Gold Slumps on Fed’s New Religion of Prudence?

3 January 2013 | by Tim Wood

DENVER ( — Much is being made of the sell-off in precious metals on news that the Federal Reserve intends to stop its $85bn monthly bond purchases sometime in 2013. The media’s assumption - at least in the case of Bloomberg’s bearishly headlined article - is that gold has been a beneficiary of the Fed’s easy money.

There’s no question that gold - and other assets - have correlated well with primarily the Fed money spigot. Yet to believe that gold’s bull market is now over on today’s announcement is to assume that the Fed has acquired a new religion of prudence where it is acting early to forestall inflation.

Are we to believe that an economy barely registering a pulse is ready to strike out on its own? The Fed indicates it may end QE4Ever and commodities decline because there isn’t real demand for them, and yields on Treasuries are spiking alarmingly.

There’s little reason to think that the springs of the Fed’s self-made debt and inflation trap are less tightly coiled.

Pimco’s Bill Gross said it all too well in his latest commentary:

The future price tag of printing six trillion dollars’ worth of checks comes in the form of inflation and devaluation of currencies either relative to each other, or to commodities in less limitless supply such as oil or gold. To date, central banks have been willing to accept that cost – nay – have even encouraged it. The Fed is now comfortable with 2.5% inflation for at least 1–2 years and the Bank of Japan seems willing to up their targeted objective to something above as opposed to below ground zero. But in the process, zero-bound yields and their QE check writing may have distorted market prices, and in the process the flow as well as the existing stock of credit. Capital vs. labor; bonds/stocks vs. cash; lenders vs. borrowers; surplus vs. deficit nations; rich vs. the poor: these are the secular anomalies and mismatches perpetuated by unlimited check writing that now threaten future stability. “

inflationary dragons lurk in the “out” years towards which long-term bond yields are measured. You should avoid them and confine your maturities and bond durations to short/intermediate targets supported by Fed policies.

Indeed, and what happens when the U.S. government’s vast stock of short-dated maturities are rolled over in the face of higher interest rates? Where, oh where will Uncle Sam get all the free money it needs to spend on entitlements if the Fed is not printing the money to buy the bonds?

Stick with a money that will preserve your wealth. That money is gold.

© 2013, > Independent Natural Resources Investment Analysis & Analytics

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