Oh so its NOT ok to make money in US equities because the Feds are creating a “what” market, criminal, immoral, what?

But you can make all the money you want shorting the US$ and buying gold regardless of a much lower US$ is again due to the feds action…really!!

It is OK to invest in US equity since FED creates the liquidity. I sold mine in March thinking that there could be a correction in summer. They crashed after I sold them and I got out at the high. I will go back in after the summer.

I am not going to short US dollar since I cannot last long enough.

o.jj — you lost me here. Where did morality come into the discussion?

Ah, now I see–in the Ackerman comment section.

oops, I ment Rockwell

Of course you are right Lawrence when it comes to currency versus currency weightings. Keep in mind we are actually watching golds value versus the dollar though. Gold is the base value against which currencies, most specifically the dollar, are evaluated. So it is not wrong in that sense because it matters how many dollars buyers will trade in exchange for one ounce of gold. At the policy level there is considerable incentive to desire a suppressed price of gold because of what that price tells the public and investors about the strength of the currency. So gold in a sense is the proxy for the general price level or how it may behave in the future as it indicates what is happening with the monetary base. During a period of monetary intervention it matters therefore whether gold is rising or falling versus dollars. And this is what drives the gold camp batty. They are insistent that the dollar is being heavily debased and yet gold refuses to confirm their suspicions. A worry at the Fed is that speculative forces would make this idea a self fulfilling prophecy as gold was bid up relentlessly despite the fact that most of the money that was “created” is actually inventoried by the banks on the books at the Fed itself collecting a tiny .25% interest rate and that credit expansion was not taking place in earnest nor was velocity rising. The worry was that if gold could not be contained it might defeat the designs interventions were intended to address and in the process cause damage to the dollar and thus to confidence. Nobody wanted to see the reserve currency destabilized. Confidence in this case refers to not just the domestic markets but more importantly to how the dollar is viewed internationally as so many other currencies derive their value directly from comparisons to the dollar itself. Lets just say that gold is problematic in that it had the power to send mixed signals that confuse policy intentions and so it is one variable that needed to be contained. So the gold camp was both right and wrong at the same time. The monetary base was expanding alright but it was not moving the needle on growth nor creating high inflation as it did not saturate the economy and lead to the desired expansion. Instead that new money just sits and sits and in theory can also be withdrawn if needed. Gold meanwhile is doing its job by telling us rather directly that Fed easing is not in fact debasing the currency to the extent gold watchers have believed until now. To have its price rise too quickly during a period of intervention is counterproductive as well because it sends a false signal as to how monetary intervention is factually impacting the economy. Inflation cannot be theorized in this case or merely projected on the future to determine golds value. Rather it must be factual. So dampening the enthusiastic and speculative forces that might prefer to see gold at much higher levels based on their theory of what is taking place in the economy is also desired. In our case, a rising dollar is often enough all that is needed to cause gold to decline even though the dollars moves higher are actually the result of another currency (the Euro) falling. The market understands this though and it does not create a conflict provided inflation is not rising too quickly. When that changes we can see the dollar and gold rise in tandem. In fact this is what I expect at a later stage. For the foreseeable future we may suspend our beliefs though as a falling euro in fact also results in gold being in decline. As intervention is gradually reduced though an incentive arises for gold prices to telegraph some inflation information as this is suggestive of a pickup in growth. That is coming. It is my belief the Fed will prefer that gold begin to rise gradually as part of that information process even while the dollar is stable.

Thanks Bird for you detailed analysis. I agree with most of what you said except a couple of points:

1. The QE money sits on the FED balance sheet as cash is a myth. I thought about it for a long time. QE is divided into two parts, buying treasury and MBS. The money used to buy bond is 100% leaked out to the economy, unless US government saves the money into the FED, which we know is not true. The money used to buy MBS is used by the banks to create new mortgage. It is also leaked to the economy. Otherwise mortgage rate would not be this low.

2. Inflation is actually really high. I go to States every year so I feel it clearly, more than people who live there. If you analyze the components of the CPI you can see 45% of the weighting is owner equivalent rent. You know rent is going up in double digits for the last few years. I own rental properties in Canada and I also have friends owning rentals in US. We all know rent is going up like crazy. But government claims it is going up by 0.8% a year. The other 15% is food. We also know food has been up 30% year on year for the last couple of years. Another is energy which is 20%. Gas is also going up quite fast. When I was in California 14 years ago, it was 99 cents and now it is 4-5 dollars. When you add all together, it is nearly 80% of total. How about the rest? you have tuition going up in double digits, insurance going up 7-8% a year. if the rest 10% components decline to result in 1.5% inflation, it has to drop 100% a year in price in order to balance it out. I don’t see it happening. So the conclusion is that government is providing us with propaganda not statistics.

I followed gold intervention theory for nearly 8 years. A few year ago, John Embry raised an issue. I remember he said when it comes to the point that government has trouble controlling gold price in regular fashion, they may engineer a huge decline in gold price using derivative and gold reserve to scare everyone out. Only problem is you don’t know when and at what level. Unfortunately it has been proven true. I kept a lot of cash just in case and I put most of it to work last summer and December. I really appreciate the wisdom of Mr. Embry. I also liquidated some gold position and US equity in Feb and March this year to prepare for the smash in the spring and summer. It happened but not as severe as I thought yet. I am still waiting.

Anyway, I don’t have everything in gold and silver but it is quite heavy. If my analysis is right, this summer will be the last bottom in gold. Too much gold has moved to the east and I cannot believe there are a lot of gold left in US. If I am willing to stay put for another 10 years, the price will go up significantly. If by some magic they can control the price, my rental property, oil and other investment will pay off. I have patience.

I appreciate your post as well Lawrence and I think your points on how intervention dollars are being used (Treasury markets and MBS) are great ones. In the case of Treasuries the Fed is financing the government. So yes, that money is straight out the door in the form of program spending. I also agree with you that inflation is factually much higher than we are led to believe by published statistics. It is something that all of us who follow markets keep in the back of our minds every day because it demands that our returns on investments exceed a threshold that is quite a bit higher than government data suggests or we shall fall behind. For example if we are targeting annual net returns of 5% (modest indeed) but actual unadulterated inflation is running at 7% for example then what we need is 12% or more from investments. Tough gig if you are averse to risk. Even junk bonds can’t offer those numbers anymore. Not even close. So instead money will be driven into highly speculative and risky bets or it shall whither. Like the Greek bonds of two years back or more recently some stock on the Russian exchanges. That is not for most people though nor the faint of heart if you harbour doubts your principle will ever be returned. What this tells me then is that the vast majority of people, including many serious investors, are in fact losing out to hidden inflation every single year. These are the worst of times to invest on so many levels. Even old reliable’s like housing can’t deliver even when rents are included. Too many asset classes are already fat and bloated and ready to decline. Would you for example consider buying more Canadian real estate after having already seen it rise 7% annualized for the past decade or would you maybe take a pass because the odds of it declining from current levels are much higher than it rising further? My point is that even assets like property cannot offer reliable long term returns with low risk anymore. So the pickle we all get into is that we must be short term traders who can reel in a few good catches annually while we remain in cash during those periods of time between strategic trades. It is definitely possible to exceed our 12% annual target in that case if we employ a disciplined approach and use some common sense along the way. The only other good option seems to be to just sit this out and wait….in which case we can park money like the rest of the crowd at 2 to 3% in the bond du jour and just hold our noses and pretend we are not going broke in the process. Ha! The misery of it all Lawrence.

Totally agree. I believe that most western governments have officially adopted financial repression strategy. In such an environment the wealth is constantly confiscated by taxation and inflation. It is tough to protect wealth. In the end, peoples” living standard must decline to pay for the past debt while building up new one.
When people talk about real estate in Canada, they usually mean Toronto and Vancouver. I would not invest there. I am in Calgary so I am more investing in energy since the economy here depends on oil demand. The rent is needed to have a return slightly better than inflation. I am not putting more money in.

Oh, I suppose they could buy the mortgaged backed securities – oh yes they are doing that already – until they own all the houses too.

Yes, sorry I did use word processor. Government should focus on providing a business friendly environment not actively involved in economy. Socialism is really bad.

Cannot believe it. I mean that I did” not” use WP. I think I should qit now.

No sweat Lawrence. I know English is a second or third language for you. I just got a laugh that it looked like you were saying the government should stop mangling the economy! You got my vote.

I kinda like manging–it’s a pretty mangy economy!

Well, well, lets be nice we all take things with a grain of salt. Yes many of them have been off by miles short term and longer term, but a few have nailed it longer term. Fundamentally speaking I take knowledge away from a few of his guest. What you do with that knowledge all depends. I learned quickly in life to hold to portfolios. Long term and short/intermediate term for daily/monthly expenses.

You know a man can’t wait 3-5 years for his investments to go up and expect to drink glen on a daily.