Market Overview

Crumbling Confidence in Government and Banks Will Continue to Propel Precious Metals


The current bull market in precious metals is set to hit new heights in the coming years (although maybe not in 2012), but many financial types still do not fully grasp the implications of what is driving the rise in gold and silver prices. In order to understand the nature of this market, one has to not only examine economic fundamentals, but also the identifiable trends in social mood and sentiment.

Both the fundamentals and psychological underpinning for gold and silver remain excellent.

The Federal Government is continuing on a path to quasi-bankruptcy and the Federal Reserve has proven that it is more than willing to recklessly print money and hold interest rates at zero in order to help finance the Welfare/Warfare state. Of course, these "policies" are also designed to stimulate economic growth and stoke some semblance of "recovery," but in that regard they should be viewed as short-sighted, failed, Keynesian political tools as well.

In aggregate, these measures have not worked very well, and the average American has not benefited to any degree from current monetary policy solutions. In fact, rising commodity prices in the face of a devastating economic backdrop have been wholly detrimental to most Americans. Because the market was never allowed to re-set and fully correct the dislocations created during the bubble years, the full effects of the downturn may have been temporarily mitigated, but a real recovery remains a pipe dream. It won't happen.

We are following the same path as Japan did in the wake of their real-estate collapse in the early Nineties, which was exacerbated by Japanese Central Bank policies similar to those currently being employed by the Fed. The consequences of this collapse and the attendant monetary prescriptions implemented as "solutions" are still being felt today. In fact, in March, 2009, the Nikkei 225 stock index reached a 27-year low of 7054.98.

While Japan has been experiencing deflation for the last 20 years, a different situation is likely to develop in the United States due to the reserve currency status of the U.S. Dollar. In sum, persistent stagflation, interspersed with periodic deflationary scares, may well define the coming decade in the United States.

A number of factors will push up the prices of commodities (and the inflation rate) despite stagnant economic growth in the U.S. Demand from a rapidly developing emerging world, which is exhibiting superior long-term economic fundamentals to developed countries, combined with inflationary monetary and fiscal policy in the U.S. will keep prices for raw materials high.

Because most commodities are priced in U.S. Dollars, a weak domestic economy will not keep the lid on prices when demand is high in other parts of the world and when speculators are hedging against destructive monetary policy, and political and social turmoil. This understanding leads to the next part of the argument for precious metals - which suggests that rapidly changing social sentiment will continue to propel prices upward.

While this article posits that domestic monetary policy has done next to nothing to benefit the average American, it has done everything to benefit both Big Government and the "Too Big To Fail" banking cartel. The Federal Reserve through its power to print money finances the expansion of government. In the wake of the financial crisis, when government revenues declined dramatically, this role has become even more prominent.

The Fed through its quantitative easing programs and ZIRP interest rate policy has distorted the market for U.S. Treasuries, allowing the Federal Government to borrow at near record low interest rates. Currently, the yield on 10-Year Treasuries is at 2.01%. This is an artificial market which is being propped up in large part by money that the Fed printed out of thin air.

Furthermore, central bank policies have perpetually eroded the value of the Dollar, which also assists the Government in managing its out of control finances. By paying interest on the national debt with Dollars that are less and less valuable as a result of monetary inflation, the burden is transferred primarily onto the backs of middle class taxpayers.

It is these policies which underpin the government's endless budget deficits, empire building, social programs and the attendant ballooning national debt, which must be managed through an invisible inflation tax levied against the people. The other constituency that has benefited from Fed monetary policy is the "Too Big To Fail" banks, which owe their continued existence to the Wall Street bailouts.

In the absence of these liquidity injections, the banking cartel, in its current form, would be extinct. Not only did the bailouts ensure the survival of the Wall Street mega-banks, but they also subsidized the concentration of their power and influence. These bailouts, along with various Fed backstops, allowed the largest American financial institutions to gobble up smaller distressed banks and brokerages in the wake of the crisis. This happened on a very large scale.

Ironically, the meltdown allowed "Too Big To Fail" to become even bigger while creating a precedent for what is essentially a Fed-backed, Wall Street insurance policy against future blow-ups. In other words, the "heads I win, tails you lose," Wall Street casino culture has been institutionalized by the Federal Reserve and the Government.

Both of these entities have assisted in allowing a situation to develop where "Too Big To Fail" institutions have immunized themselves against a "Lehman Brothers outcome" because their failure would be too systemically catastrophic.

It is within this context that current trends in social mood can be properly examined. You see, the people have finally woken up. The Tea Party movement and Occupy Wall Street are both forms of "blowback" against the economic and political reality presented here. Even if many Tea Partiers, Occupiers and everyday American citizens cannot fully articulate the exact nature of the problems, they understand the main points.

They understand that the average American has been screwed over. They perceive that the Fed, the Wall Street banks, the Congress and the Executive Branch are the most justifiable targets for their ire. Deservedly, all of these institutions are seeing the people's confidence in them crumble at an alarming rate. Furthermore, the legitimacy of these institutions in their current form becomes compromised when they lose the confidence of the citizenry. This is happening right now.

One of the consequences of this social shift will be people's growing inclination to hedge themselves against shocks to the political and financial system. Growing distrust towards debt-based fiat currencies and financial assets with significant counter-party risk will trigger more dramatic price increases in precious metals and other hard assets.

Against this unfolding backdrop, gold and silver will continue to soar and outpace other investments. Gold prices, in particular, are a very good barometer for measuring the relative anxiety and uneasiness of the people and the markets. In addition to the more quantifiable fundamentals, the even-more-important collective psychology underpinning the precious metals market is wildly bullish. The current atmosphere is creating an almost perfect storm for gold and silver.

Posted-In: Long Ideas News Bonds Futures Commodities Politics Forex Psychology Best of Benzinga


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