Government Prints Money and Investors Turn to Gold!

February 4, 2009 Market Updates, Physical Gold, Politics No Comments

When governments print money (read monetize debt), investors turn to gold. It is just that simple. We are in the early phases of government printing money and investors are already turning to gold.

Gold futures crawled back above the $900 an ounce mark after the U.S. posted 552,000 job losses in January. Gold for February delivery was up $10.10, or 1.1%, at $902.10 an ounce on the Comex. Twenty four hour gold is trading up $1.50 at $902.10, the DOW is down 27 at 8,050, the NAS is up 15 at 1,531, while the dollar defies gravity and is trading up .645 ( .83%) at 85.656. The battle over $900 per ounce rages on as the “stimulus” bill grows ever larger. Once this package is passed gold will blow through $900 and never look back.

gold coins and bars Government Prints Money and Investors Turn to Gold!

Government Debt Versus Gold

Gold remains in a narrow trading range with support showing up at the $895 level and resistance in the $910 range. This market is very nervous and constantly looking for the next shoe to drop. As we move forward the indecision in the gold market will melt away. Physical gold purchases are up for both the average investor and for central banks.

Where’s The Good News?

The news is a constant barrage of bad results for companies as they try to navigate the turbulent waters of this financial meltdown. Last week the Wall Street Journal had these headlines in the MarketPlace section; Amazon’s Sales Surge, Bucking Retail Slump; As Red In Spills, Ford Drains Credit Lines; After a Rough Year, Airlines Bet On More Fees; Kodak Resumes Cuts After Loss; Utillities Scramble as Electricity Bills Fall and these are just a sampling of the news. There may be one positive piece per page. With the outlook this bleak, it is not surprising that investors are trying to hang on to what little they have left.

This bad news, which started in the banking sector and has spread throughout the economy and the globe, is pushing people into distrusting government and the financial institutions. This lack of trust in the system is moving investors into gold. Fiat currencies can only operate when the populace has faith in them. We are rapidly moving into the loss of faith phase.

The Federal Reserve (which is neither) has been stoking the fire under gold with it’s change of stand in the last two months statements. Compare the wording and see for yourself. In December the Fed said,

“In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters“

and further into the December statement they added this,

“The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities.

In January the statement changed to,

“In light of the declines in the prices of energy and other commodities in recent months and the prospects for considerable economic slack, the Committee expects that inflation pressures will remain subdued in coming quarters. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term”.

Further into the statement the wording changed to,

“The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets”.

On the one hand the Fed sees deflation as the threat and in the next breath it wants to fight the deflation by purchasing longer-term treasuries. This is absurd because central bank purchases of long term treasuries represents direct monetization of government debt. Ostensibly, this is being proposed to effect the interest rates on the 10 year treasury note to which mortgages rates are tied, with the belief that lower rates can stop the downward spiral in housing prices.

The latest Fed balance sheet showed that long term treasury purchases have already started, with around $1 billion in notes purchased for the week ended January 21st. As these purchases increase, expect to see more investors move into gold. When the government prints money (monetizes debt), investors turn to gold. This is just the tip of the iceberg of things to come. Be prepared and buy gold.

Till next time, good luck and good trading!