Sunday, August 09, 2009

Bond Price Post Updated - More on Quantitative Easing

9 August 2009, 14 August 2009

For interested readers, I have updated my May 27, 2009 post on bond prices.

Click here for more information about the breakout above the 65-week moving average, which is the confirming signal for the turnaround in 30-year interest rates - and thus for the credibility of the financially irresponsible American government.

For now, the trend reversal in interest rates (and the market value) of the 30-Year US Treasury Bond is holding.

In my Weltanschauung, that signals the onset of the gold tsunami.

How much has the US Federal Reserve spent on quantitative easing (purchasing US Government Bonds with newly-printed money "out of thin air") since March 25, 2009?

According to Bloomberg Financial, as of August 8, 2009, that amount stands at over $243 billion US dollars (shall we now just refer to the US dollar as play money?):

"The Fed announced on March 18 a plan to cap consumer borrowing costs by purchasing up to $300 billion of U.S. debt over six months, a policy known as quantitative easing. The central bank bought $243.463 billion since the purchases began on March 25."

A gentle reminder. The purpose of quantitative easing is that the new dollars released into the economy will be multiplied through redeployment and leverage. Thus the impact on money in circulation may be greater than the amount of new dollars created. Be prepared for continued strength in the gold market over the next several months, and for long-term strength in the gold market for at least another decade!

Note that gold is getting impatient sitting under $1000, a market price it has been nudging at from underneath for almost two years now. $1000 gold will soon be a receding memory:

Especially when you look at the price of gold in inflation-adjusted terms:

(And the official government-sanctioned inflation adjustment in the above chart doesn't begin to consider John Williams' restoration of cost of living methodology to traditional measures. Remember, the government introduces "hedonic" adjustments that drastically understate the true rate of inflation!)

The chart below is closer to how John Williams saw the inflation-adjusted price of gold (in 2007). How would we adjust the following chart for 2009? Well, the 1980 gold price would be closer to $6000, and the gold price on the right would be elevated by one more inconsequential increment, from the $700 range to the $900 range.

No matter how you look at it, gold has a long way to go - in the upwards direction.... This chart is courtesy of Pamela and Mary Ann Aden:

So how do these trends show up in government budgets, particularly in the area of receipts versus expenditures? EconomPic offers the following very sobering illustration. (Note: Only money printing will fund the increasing government outlays, and that spells more inflation - much more!)

I hope you can see that the price of gold, at its present $1000 level, remains quiescent in historical terms. This is still a very early stage bull market in gold, and $1000 is a bargain price that we won't be seeing for very much longer! Gold was cheap in the $250 range in 1999-2001, and it remains cheap in the $1000 range today. Really, the 300% gain of the past decade is just a blip in terms of gold's multi-millennial history....

In my book, play money may prove a better long-term holding than the US dollar.

Gold remains the place to be.

And, if you're interested in following news of gold's price more closely, try this link (Bob's Gold Price Column).

14 August 2009: I think I have found the answer to the inflation versus deflation debate, courtesy of a reader of Bill Fleckenstein's online site.

When you think about it, the present inflationary processes are very simple.

1. We know inflation is afoot, because of the vast increases in money supply across most leading economies of the globe. The increase in money is dramatically outpacing the supply of goods and services available.

2. What prices are rising? The costs of those things we have to have: staple food items, energy and fuel, insurance, taxes, government services, delivery costs, materials and commodities, almost all manufacturing and production inputs, health care, bankruptcy services (for goodness sake!)....

3. What prices are falling? Those for items and services that are discretionary... Houses that are larger and more luxurious than we need, restaurant meals, cellular telephones and computer upgrades, vacation accommodations, etc. You've got it - the kinds of things that cash-strapped and newly-unemployed consumers have stopped purchasing - out of necessity!

Fleck's reader perhaps says it better:

"It seems that an extremely important point is being missed in all of this talk of deflation: when evaluating the price (or price change) for a purchased product or service, one must first determine if the spending is essential or discretionary. Is it a coincidence that the items mentioned by the writer of the last post as examples of price going down - a new harp, KFC, Applebee's, cell phone minutes and a DVD for his kids - all represent discretionary spending?

"On the other hand, essential spending items such as food, fuel, taxes and utilities are all on the rise for everyone, whether we like it or not. The sad reality is that demand is WAY off, despite the immediate effect of the stimulus program which was specifically in the auto sector.

"In fact, costs keep rising: raw materials, freight, taxes, insurance, utilities, etc. I should also add, with regret, that one cost center in my business is half of what it was a few years ago: labor.

"I know for fact that I am not the exception. It is not good out here in the heart of industry so it is no surprise that one can find goods for cheap when they are in someone's inventory. I'll sell you anything that I have in stock for less than my replacement cost because I need the cash flow.

"Conversely, if you need something that has to be produced because inventory ran out, there is NO way that you'll pay as little as you did a year ago.I assure you that this is the case with virtually anything being made; therefore KFC giving away chickens is simply because they cannot sell enough of them to make ends meet. There aren't enough of us going into their stores anymore. And if that weren't bad enough, their operating costs are on the rise. The DVD retailer and Hollywood are discounting "Coraline" on release day because some OTHER guy is NOT buying it for his kids. Why not? Because his credit card is loaded and he just lost his job from my company."

Are prices going down because the seller has no pricing power evidence of deflation? No - that is evidence of recession - of a business downturn - of a period of recovery following a period of excess.

Are rising prices of necessary items and services evidence of inflation? Yes, absolutely. That is what inflation is - when we have no choice but to pay higher prices for almost everything that we need.

Inflation versus deflation debate: Ended here.

My gold tsunami posts are as follows:

There Is a Tsunami Coming in Gold

Gold Tsunami II: Anthropomorphizing Gold

Gold: Safe Haven in the Approaching Perfect Storm

Gold Tsunami III: James Kunstler's Use of the Analogy

Bond Prices: The Seismic Shift That Triggers the Gold Tsunami (IV)

Gold Tsunami V: The $23 Trillion Bailout... and Counting

Gold Tsunami VI: Looking for Patterns in Gold Price Advances

Gold Tsunami VII: This Is It

Gold Tsunami VIII: Gold Mining Stocks Now Participating

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