With another round of quantitative easing being injected into the US economy, Ben Bernanke is "giving the markets their liquidity fix." This demonstrates that governments across the markets have no fiscal discipline and opt for ultra-easy monetary policies to stimulate growth instead.
9/18/2012 @ 10:47AM
With another syringe of quantitative easing being injected into the U.S. economy’s bloodstream, Ben Bernanke is giving the markets their liquidity fix. The Federal Reserve’s action reaffirmed my stance I’ve reiterated on several occasions that the governments across developed markets have no fiscal discipline, opting for ultra-easy monetary policies to stimulate growth instead.
The government’s liquidity shot promptly boosted gold and gold stocks, as investors sought the protection of the precious metal as a real store of value. There has been big action in GLD, GDX, NEM, HL, GG and others. You can see below the strong correlation between the rising U.S. monetary base and growing gold value. Since the beginning of 1984, as money supply has risen, so has the price of gold.
The dollar declined due to the Fed’s easing, which isn’t surprising, given the fact that gold and the greenback are often inversely correlated, and increasing money supply generally causes the currency to fall in value.
What’s interesting is that currency decline was what Richard Nixon sought to avoid when he ended the gold standard in 1971 and announced that the country would no longer redeem its currency in gold. During his televised speech to the American public, Nixon translated in simple terms the “bugaboo” of devaluation, saying, “if you are among the overwhelming majority of Americans who buy American-made products in America, your dollar will be worth just as much tomorrow as it is today.”
As you can see below, more than 40 years later, a dollar is worth only 17 cents. This significant decline in purchasing power only strengthens the case of gold as a store of value, likely prompting Global Portfolio Strategist Don Coxe to propose making Nixon the “patron saint of gold investors,” during this year’s Denver Gold Forum.
As Milton Friedman once said, “Only government can take perfectly good paper, cover it with perfectly good ink and make the combination worthless.”
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