Bernanke Has Everyone Fooled With "Talk" Of More Fed Quantitative Easing

Anyone who reads the articles that I write knows that I am and have been very bullish on physical gold and silver. There are a multitude of reasons for this, primarily stemming from the fact the entire banking and monetary system is unsustainable because of monetary policy and congressional mischief (aka uncontrollable spending, Fannie and Freddie mismanagement, banking laws that allowed abuse of fractional reserve lending etc. etc.).

This does not mean that gold and especially gold mining shares can go up indefinitely. There will always be pullbacks.

Gold overnight hit a record high of $1,365 before some profit taking took hold in the U.S. today, coupled with a stronger dollar. Gold as I type this is trading $30 less than that high at $1,335 an ounce.

Financial Advisors Never Recommend Taking Profit

As Peter Schiff and other advisors learned in 2008, those who are late into a bull run can get burned. Granted, Schiff’s clients who were late to the game did come back from being 50% or more down, but I don’t hear Peter Schiff cautioning recent investors that a pullback in gold mining shares could occur again. Note: Schiffs recommendations of ownership of physical gold in 2008 and before were correct, albeit at the time he was recommending the only type of gold he could make a profit from; Perth Mint Certificates. He has since started selling physical gold and silver and I give him credit for that.

The fact of the matter is, I don’t hear anyone saying a pullback in gold and silver mining shares could occur except for trader Dennis Gartman. But Gartman thinks gold is “just a shiny rock,” and doesn’t really consider it money or insurance. At least that’s what he called it on CNBC last year in an interview on Fast Money.

Schiff put out a video today saying that gold should continue seeing record highs and that inflation is the reason. I disagree. While there is monetary inflation occurring, a known by everyone, it is being dwarfed by the credit contraction that is occurring. This is an area that some in the Austrian economic camp never address (primarily Schiff and Gary North).

I dedicate an entire chapter to this analysis in my book, “Buy Gold and Silver Safely,” with 100 footnotes of Austrian economists to make my case of this credit contraction, including professors who possess PhD’s. This analysis points to overall deflation as the primary trend. This is what Bernanke and the Fed are worried about.

Please note, deflation doesn’t mean gold will fall. I pointed this out in What Does the Price of Gold Do In Deflation? But I did caution traders of gold mining stocks to start locking in profit when gold hit $1,314 an ounce. The reasoning to do so stemmed from the data I outlined in that article.

1. HUI has not broken out

2. Double top in the HUI (some would say a triple top)

3. ProShares UltraShort 20+ Year Treasury (TBT) is in uncharted territory. What this shows is that people still have faith in treasuries. In fact, what we are seeing is the perceived safety in treasuries as the deflationary credit contraction continues.

4. 10 Year Treasury back below 2.5%

5. Stock market trending higher, now over 10,800

6. No, I am not going to include here the National Bureau of Economic Research (NBER) statement that the recession has ended as it is just a bunch of baloney.

7. But I will include the fact that Republicans are possibly set to take control of the House and Senate again in November, and this could spark interest in the stock market rather than gold for some. Remember, professional traders want what’s hot and while gold has been hot, the stock market could be poised for a move despite the fact valuations aren’t there.

8. Some of the Elliott Wave folks are calling for gold and silver to fall. The following charts are from Ron Rosen from the Rosen Market Timing Letter where he points out that AEM, CDE, FCX, ABX, HMY, KGC, for gold, and PAAS and SSRI for silver, have not broken to new highs.

The HUI did in fact break to a new high, finally, but I wrote in that article the following observation for traders to consider;

So while there still could be a push higher with the price of gold and silver to trap any shorts, the data right now tells me to be cautious and possibly take profit on trades. Market makers aren’t stupid and read the same data and charts as everyone else. One has to account for this in their trading.

It seems we have experienced this blow off top and are now going to see where this current down turn takes us. The HUI is down 2% as of this writing, currently trading at 518.

Of course every time I make comments about taking profit in gold mining shares, I have to clarify that statement with the fact that a holder of physical gold and silver care not that it falls 20% on its way to 100% or more in gains. The two assets are not equivalent. One is a proxy of the other. Eventually, all paper proxies of wealth will chase the real wealth represented by physical gold and silver.

What Does the Data Say?

What I try to do is look at the data and call it like I see it. I also try and extrapolate what the Fed is saying from what the Fed is doing.

Everyone knows the Fed has been manipulating interest rates and was stimulating the economy in the trillions in the past few years under Bernanke’s tenure. The Obama administration is complicit in all of this stimulus in their attempts to revive the economy.

While the NBER is claiming the recession is over and the DOW marches towards and will probably surpass 11,000, the economy has not recovered. The stock market is not indicative of the economy. The stock market is indicative of what people on opposite ends perceive value to be; the buyer and the seller. Of course the same could be said of gold too. Lately, everyone has been talking about gold, but everyone is not yet invested in gold.

The Data

Unemployment is still down as companies still continue to cut back. The manufacturing index fell in September and the Baltic Dry Index 200 day moving average, after consolidating, looks to be resuming its downward trend.

Add to this the fact that banks aren’t lending, consumers aren’t buying and corporations aren’t expanding and we have a recipe for a further decline in economic activity.

Bernanke Is Just Doing What He Said He Would Do

So what is Bernanke doing scaring everyone with talk of more quantitative easing, aka QE2? And Bernanke’s not alone, there are other members calling for more easing come the November 2nd meeting by the Fed.

I addressed what Bernanke and the Fed are up to in Why Should Anyone Believe Bernanke When He Says “We’re Not Out of Ammo?” when I said;

Bernanke is all talk and the truth of the matter is, if the Fed uses more quantitative easing through buying of bonds or printing more dollars, it will push the economy into a tailspin, the likes we have not seen since the Great Depression.

If every sign that l see is to complete
Then l’m a fool in your game
And all you want to do
Is tell me your lies
Won’t you show the other side
You’re just wasting my time

All you do to me is talk talk

-Lyrics Talk Talk by Talk Talk

All Bernanke and the Fed Want To Do Is Talk Talk

Bernanke is worried about deflation. In the article I wrote, Can the Federal Reserve Prevent Deflation?, I pointed out the Fed will pull out all stops in manipulating the economy;

So while the Fed has thus far failed in its attempt to stimulate the economy by  dumping a few more trillion into the economy through the entities mentioned above, they will no doubt keep trying to come up with new ways to get the economy going. But the Fed cannot force businesses and consumers to take on more debt.

The interesting thing to me is people still believe Bernanke at his word. But what would be the consequence of even more quantitative easing? It would be disastrous to the economy and the U.S. dollar. So why not accomplish what he wants to occur without doing anything?

The Fed’s hand doesn’t have to be exposed yet. Treasuries are still where money is flowing. If everyone was worried about the U.S. dollar falling off the face of the earth, would the 10 year treasury be at record lows, currently hovering around 2.4%? Would the ProShares UltraShort 20+ Year Treasury (TBT) be at multi year lows?

I don’t expect anything to occur at the November 2nd Fed meeting except for more talk, talk. That’s a trick in the bag that evidently still works. But eventually, sooner than later, the market and people catch on.

Meanwhile, I expect a pullback in gold mining shares and gold and silver could take a hit. I expect this to be the perfect opportunity to dollar cost average into physical ownership of gold and silver. As I wrote yesterday, one should Buy Physical Gold and Silver Before Precious Metal Stocks or ETFs. Taking some of the profits made in the mining shares and putting them into physical gold and silver gives you the insurance and peace of mind that counteracts any Fed future quantitative easing, whenever they decide to actually do it rather than talk about it.

But even then, there’s that credit contraction issue that no one seems to comprehend.

Either way, physical gold and silver will shine as a long term must for every portfolio.