In September, every Wall Street chatterer with media access swore up and down and to high heaven that tapering was in the cards. It was a slam-dunk, a fait accompli that the Fed would reduce money pumping to $60 billion per month from $85 billion.
So much for chattering and consensus estimates. The Fed continues to pump freely to this day.
Nevertheless, the prospect of it pumping less freely (tapering) weighs on gold and silver, as it has since April when both metals sold off on the first whispers of tapering.
Tapering matters. Both gold and silver are inversely correlated with real interest rates – the nominal rate minus the inflation rate as measured by the consumer price index. The higher the real interest rate, the lower the gold and silver price.
When and if the Fed tapers, nominal interest rates will rise. With consumer price inflation running cool through most of 2013, real interest rates will likely rise as well. This means the opportunity cost of gold and silver will rise.
In short, other asset classes, particularly those that provide a cash flow to investors, will become more appealing compared to non-cash-paying gold and silver. Since April, investors have found gold and silver decidedly less appealing.
I, on the other hand, find gold and silver more appealing.
The new consensus estimate is for the Fed to taper in the first quarter 2014. When that occurs, interest rates will push to a higher level… and maintain that level.
I didn’t buy the last consensus estimate; I’m not buying the new consensus estimate.
The recovery from the 2009 recession remains weak: The economy limps along with annualized GDP growth that barely exceeds 2%. The unemployment rate, ensconced at 7.3%, maintains that level less because of new job opportunities and more because of a falling labor-participation rate.
Don’t be fooled by a strong stock market; it’s not synonymous with a strong economy. To be sure, many companies have increased efficiency and productivity over the past four years. That said, the share price of many companies is being lifted as much by the Fed’s money pumping as by improved operations.
When the Fed’s money enters the economy, it enters through a cadre of large Wall Street financial firms – the primary dealers. Much of this new money has entered the stock market through direct purchases by financial institutions that get first use of the Fed’s money.
Money also enters the stock market through cheap leverage. Barclays Capital chief stock strategist Barry Knapp estimates that 40% of the increase in per-share earnings in the S&P 500 is attributable to reduced share count financed with cheap debt.
In short, if the stock market and other assets tank, there is no recovery to point to. The Fed is in no position to let that happen. Therefore, I don’t see tapering on the horizon.
This is good news for gold and silver for the immediate future. Interest rates won’t be induced to rise, so gold and silver will become more appealing to more investors.
Longer term, gold and silver’s store-of-value benefit will appeal to more investors due to relentless monetary inflation. Monetary inflation, in turn, will lead to consumer price inflation.
In High Yield Wealth we’ve recommended that subscribers seek additional gold and silver exposure through income-generating investments. We believe these offer exception income and price-appreciation potential, as well as a hedge against future consumer-price inflation.
But if income isn’t an immediate need, I recommend gold and silver ETFs like the SPDR Gold Trust ETF (NYSE: GLD) and the iShares Silver Trust ETF (NYSE: SLV). Both investments move in lock-step with the spot price of their respective metals. As the spot price of gold and silver rises, so will the share price of these ETFs.
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