Three years ago the credit crisis exploded and by all accounts we were just minutes away from total economic Armageddon. Stocks tumbled as we saw the DOW fall from record highs above 14,000 to just 6,626 by March 2009. The S&P 500 index fell from a record high above 1,500 to 683 during the same time period. The NASDAQ followed as it fell from a high of 2,810 to a low of 1,293.
Then, in the markets' darkest hour, came the Fed to the rescue with Trillions of dollars in printed money and stimulus. The crisis was averted and all the markets headed higher! Since then, the Fed stood at the ready to print even more money - TRILLIONS MORE!
In addition to what the Fed printed, the administration also printed money by increasing deficit spending. Over $4 trillion of additional budget deficits were committed during fiscal years 2009 - 2012. $4 trillion that would accompany Fed printed money into a failing economy as a form of life support.
While money flowed into the economy, the markets expressed approval. All the indexes moved steadily higher, with progress interrupted only by short-lived threats that stimulus (printed money) may run out. One such threat came in the summer of 2010 when the markets dipped about 12%. QE1 had filtered through the economy but failed to provide stimulus enough to get the economy on track on its own. Hence, the Fed stepped in with QE2 and the markets resumed their course higher.
S&P 500 Chart (September 8, 2008 - August 5, 2011)
We saw it again in May 2011 when the $14.3 trillion debt ceiling approached with no agreement to have it raised. The markets knew the economy had no chance without more printed money so they dipped. Only when Treasury Secretary Geithner announced he could do things to extend the deadline, was another crisis, at least temporarily, averted and the markets moved cautiously higher.
Then, along came another deadline. August 2! If the debt ceiling was not raised by then, another economic Armageddon was certain. This time, opposition to raising the debt ceiling was fierce. The markets saw this, didn't like it, so in the days prior to August 2, the markets plunged. The message from the markets was clear. Don't mess with our supply of printed money. But, it was too late. While an agreement to raise the debt ceiling was reached, the markets did not approve of the process nor the result. The supply of future printed money, via deficit spending, was still believed to be at risk of being severely limited.
Again, a clear message was sent. The Dow lost 512 points. There was simply too much uncertainty left over from a short-term, 11th hour fix to a problem that may take decades to work itself out. Then the bombshell. The feared downgrade of U.S. Credit came. With an entire weekend to ponder the ramifications, an angry market opened Monday and proceeded to drop another 633 points. As if the threat to the future supply of printed money was not enough, the markets now had to reckon with the potential of higher interest rates. Surely, this would further hinder liquidity.
Enter Ben Bernanke. As he had done so many times, Bernanke came to the rescue, (or tried to) with the promise of low interest rates until 2013. Seemingly, this move countered the effects of the downgrade and the markets rallied 400 plus points. The rally, however, was short lived and today the markets are reaffirming their position that without printed money there is no economy.
Can it be more clear? The markets want printed money. They want inflation by way of a cheaper dollar. And, while they do not favor default on debt, they do favor the repayment of debt with cheaper dollars. Time and time again the markets have gotten what they asked for and I expect this time will be no different. That's why I believe this makes some version of QE3 by the Fed, imminent, making the future of gold look brighter than ever.
While it is clear the markets are demanding printed money, the reaction of gold to printed money is just as clear. Since the onset of the credit crisis 3 years ago and the ensuing creation of money, gold prices have more than doubled. You cannot print money without debasing the value of the currency you print. Hence, higher gold prices. This morning Ron Paul was interviewed and asked, how high can gold go? He answered saying it was not how high gold can go but how low the dollar can go. With that proviso, he said gold could easily be $2000 or $3000 an ounce.
Two days ago, JP Morgan echoed this sentiment calling for gold to hit $2500 by year-end. That's a bold claim one expects to hear from a gold company, not a bank - but there it is. You might as well get used to it. We live during a time when printing money is necessary to maintain this economy - and we will get it! Globally, this could destroy the dollar's rank as the world's reserve currency but there is no choice. Ron Paul warns the end of the dollar is coming. There seems to be no other way.
Does this all add up to higher gold prices? If the last 3 years of printing money is any indicator of what gold can do in the next 3 years, it's easy to make a case for a repeat performance in gold and a rise in price above $4,000 an ounce. With gold reaching what seems to be new highs every day, it's clear some big money agrees more printed money is headed our way. Globally, central banks are buying more gold, countries are adding gold to their reserves and a fresh influx of gold is now pouring into Individual Retirement Accounts. Yes you can own gold in your IRA and people are doing it.
Can we expect a rally in stocks ahead? Sure stocks can rally, but the real question is, which asset will best preserve purchasing power? If we believe the charts, the answer is gold. Over the last 3 years gold has clearly outperformed stocks in price and purchasing power. If we truly have 3 more years coming, just like the last 3 years, then gold wins hands down. Got gold?