EDITOR: | December 3rd, 2012

Gold And Silver In 2013.

| December 03, 2012 | No Comments
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We are one week out from the last Federal Reserve Meeting of the year, December 11-12, and in all probability, one week away from QE4 getting announced. That’s because the Fed’s “operation twist” ends at year end and if not replaced, the Fed’s monthly life support to the market, would abruptly fall from 85 billion a month, down to 40 billion a month. In operation twist, the Fed sells 45 billion of short Treasury securities and buys 45 billion of long dated Treasuries instead. The idea being to keep long interest rates low and in theory stimulate the US economy. QE3 started in September and has the Fed buying 40 billion of treasuries monthly, with new money it creates out of nothing via its electronic printing press.  The Fed says not to worry about all this, because once a real sustainable recovery commences in America, the Fed will reverse itself and scale down its balance sheet so there won’t be any giant bout of inflation.

Whether they will or even can do this, is a big unknown, with an even bigger unknown of what it would do to  the sustainable recovery.  Most economists think it would kill off the recovery almost immediately, and that at best the Fed would be very slow to try, if at all. In other words, once a recovery commences, there will very likely be a big burst of dollar inflation as the Fed drags its feet trying not to kill off the recovery. But the more immediate problem is how to replace the missing operation twist’s 45 billion a month starting in January. Not replacing it sucks 45 billion a month out of the US economy, just as America is/is not going over its “fiscal cliff.” The most likely outcome is that in a week’s time the Fed adds 45 billion a month in QE4 to QE3s 40 billion a month, starting sometine in January.

It doesn’t take a genius to see where 85 billion a month leads to, it’s $1.02 trillion a year. American’s and other dollar holders, have a very big reason to be holding at least 10% of their wealth in physical gold and silver. Unlike Europeans and Asians, very few Americans actually do so. My guess is that as 2013 unfolds, most of America’s top 1% plus hedge funds, will add gold and silver to their asset mix against a very uncertain dollar future. Better to hold an asset of real tangible value, than to hold fiat dollars in a zero interest rate environment, with the Fed adding a trillion new dollars a year, for at least 2013 and 2014.

But over in Europe, the euro and the Pound Sterling are also in deep trouble. 2013 will likely see Greece and a few others exiting the euro monetary union. Depending on how bad the French economy gets on the old socialist policies of President Hollande, France, the eurozone’s second largest economy, may be in need of a bailout itself. That won’t happen due to its size, and the euro might very well die in 2013. Most Europeans have a very big incentive to add to their physical gold and silver holdings and my guess is that we will see continued European buying all year.

And that brings us round to the UK’s rickety Pound Sterling. What is the value of the Pound if the United Kingdom breaks up in 2014, when Scotland is due to hold a referendum on going independent, and becoming the next Iceland or Ireland? While at the moment, independence trails in the polls about 60 against to about 33 for, a no vote is by no means a certainty. If the euro flies apart in 2013 ushering back in multiple European currencies, Scots voters might very well decide to join in that game. Overwhelmingly most of the UK’s population lives in England. The English, and other holders of UK Pounds, are now highly incentivised to hedge their future with some physical precious metals. Almost alone of the Europeans, like Americans, very few Brits actually own much physical gold. My guess is that this will change as 2013 develops.

As for Asia, I see no reason for India’s interest in physical gold to diminish, nor for China’s rising demand for physical gold to stall. With massive foreign exchange reserves mostly held in dollars although with some euros, China has a massive interest in increasing its gold reserves all decade, and scaling down its holdings of paper currencies. 2013 could become and explosive year for physical gold and silver.


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