Will Fed's Ease Create Gold Bubble?
Even as the CRB was near and gold was at all time highs, the Fed was forced to ease 75 bps in a single day on Tuesday.
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Remember, the Fed is easing with gold at an all-time high. When has this ever happened in history? It hasn't, because never before has the threat to the financial system been so horrific due to all the leverage and financial engineering that has built up over the past 25 years. To allow this to "unwind" (as it should have been allowed to years ago) is now virtually impossible due to the dire consequences involved.
Faced with that prospect as stocks began to crash and the two largest credit insurers were teetering on bankruptcy, the Fed was forced to ease 75 bps in a single day on Tuesday (and promise more easing to come), even as the equal-weighted CRB (CCI) was just a few percent off its all-time high and gold was at an all-time high. The result is going to be that Wall Street will now take that 75 bps and create more money and credit (i.e. "print money"), but the "liquidity" won't go where the Fed wants it to go (i.e. the US credit markets).
Where it will go, however, is into gold and certain other hard assets, because this time around "printing money" is not going to blow an asset bubble that will support the US economy, unlike in 1998 (when the Fed created the stock bubble) and 2001-2003 (when the Fed created the housing bubble). Now all we are going to get is a collapse of the world's fiat dollar-based monetary system, more inflation on top of a weak economy (i.e. stagflation), and a "bubble" in gold.
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Predictably, the Fed has chosen to "run the printing press" and inflate its way out of the housing bust, and inflation is exactly what it will get for its efforts. If this thought process sounds new, it shouldn't be, because I've been talking about how the Fed would inevitably respond to the housing bust and what the likely result would be for over a year. And I feel things continue to unfold pretty much to script...
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