Fight the Fed with silver and gold

Central bank shenanigans and rising inflationary fears are fueling a big rise in precious metals. It's set to continue.

By Anthony Mirhaydari Feb 23, 2012 4:40PM

Stocks have largely stalled out over the last few days as traders think twice before pushing the Dow through the 13,000 barrier. The real news, aside from the worrisome rise in crude oil, is the breakout underway in the precious metals. Both gold and silver have jumped out of two-month trading ranges in a big way.


The same dynamic that's driving energy prices is fueling the rise in gold and silver: Big time inflation concerns. With those about to get worse, the rise in the glitter stuff is set to continue.


Here's why.



Looking at the Federal Reserve, the Bank of Japan, the European Central Bank, the People's Bank of China, the Bank of England, and the Swiss National Bank, these central banks have pumped the equivalent of nearly $7 trillion into the system over the last four years.


Those levers have been pulled. That strategy has been tried. With the rich world drowning in $8 trillion in excess debt according to Credit Suisse estimates, more debt isn't the answer.


Massive monetary intervention by the world's major central banks is resulting in undeniable commodity price pressures. Crude oil closed above $107 a barrel today for the first time since last May and has moved higher eight days in a row. We're a far cry from the sub-$35 a barrel oil that helped get the economy back on track in early 2009.


What's worse is that these pressures are feeding into so-called "core" measures of inflation on things like drugs and clothing. The Fed cannot deny what's happening by dismissing them as merely "transitory" and volatility energy and food price spikes -- as they did last year in their efforts to defend their increasingly dangerous, dollar-debasing policy interventions.


The market seems obsessed with both the second issue of unlimited three-year bank liquidity by the European Central Bank due next week and the potential for a third round of quantitative easing out of the Federal Reserve in the months to come. Both essentially amount to a dump of ultra-cheap money into the financial systems, even if the details and implementations differ.


If you talk to the bulls, their thinking is simplistic: All problems are irrelevant because the Fed and the ECB will just pump more money into stocks. Nothing else matters.


But the thing is, the Wall Street puppets at the Fed have been cornered. If they have any shred of intellectual honestly left, chairman Bernanke will hold fire on QE3 since inflation is already above the Fed's new inflation target and still rising. If they aren't, and QE3 is launched this spring as I expect, stocks might pop initially but the diminishing marginal benefit of additional policy easing will just make the situation worse.


The same goes for ECB head Mario Draghi over in Europe, who is about to unleash another round of ultra-cheap three-year loans to eurozone banks next week.


In other words, instead of boosting the economy by lowering already rock bottom borrowing costs, a "QE3" out of the Fed or a "LTRO 2" by the ECB will just damage the economy by further increasing inflationary pressures. God knows they've done enough already. But with an abundance of false confidence, encouragement from the financial denizens in Manhattan, London, and Frankfurt, and a lack of political oversight, they'll do it anyway. 


That's all great news for precious metals investors -- even if it's terrible for everyone else.


I recommend the ProShares UltraSilver (AGQ) as a high-risk, high-reward way to get exposure -- so I'm adding it to my Edge Letter Sample Portfolio. There is also the iShares Silver Trust (SLV) for the risk averse. Silver tends to be the flightier, more speculative cousin to gold -- making it perfect for situations like this. 


I found both AGQ with the help of technical screens developed with Fidelity's Wealth Lab Pro back-testing tools, which you can find here. (Fidelity sponsors the Investor Pro section on MSN Money.) 


Disclosure: Anthony has recommended AGQ to his newsletter subscribers.


Check out Anthony's investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up. Contact Anthony at anthony@edgeletter.c​om and follow him on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.



Feb 23, 2012 6:45PM
What's more of a ticking time bomb, gold or our national debt? Gold and metals in general have some proven intrinsic value, the dollar in it's current state has almost none.  
Feb 23, 2012 6:00PM
Gold and silver have been the safe haven of wealth in the past and probably now with the Fed on course to destroy what is left of the value of the dollar.  I can not condone this reckless behavior.  It is mind blowing that the Fed wants to try past failed attempts to get this economy on track. Smile
Feb 23, 2012 10:51PM

MJZ2012, are not the increased margin requirements still in place?  This metals rally is going on inspite of the higher margin requirements.  Sure they could raise them still higher.  It is more likely they will raise stock margin requirements.


All this cheap capital has to go somewhere.  It will not go to Real Estate.  That leaves Foreign currency (Canadian/Austrailian Dollars come to mind), Specie, Commodities like Oil, and of course Stocks.  Sell Bonds, Treasuries (unless you want a future haircut), CD's and Dollars...


M2 was increased 10.7% last year and 34.4% over the last 3 years.  That should result in 34%  inflation.  If you increase the printing, it will just get worse...

Feb 23, 2012 9:18PM
This is the worst of many bad ideas from Mirhaydari. Here is what is going to happen. Silver demand is increasing with the unleashing of pent-up industrial demand for silver, which is an important industrial metal with many many uses. The price of silver will spike until about May - as it did last year. Then the CFTC will raise margin levels drastically, as it did last year - in fact, 4 times in one week! This will cause a massive sell-off by 25 - 33% in the price of physical silver. But if you are investing in an ETF like this - the price movements are worse and more dramatic. True, this is high risk high reward - but the risk is virtually certain when the CFTC manipulates the market. You have no protection against market manipulation.
Feb 24, 2012 9:53AM

Anthony, think you have a misread on the Fed and Oil/Commodity prices.


The commodity index as a whole is way down. That's one of the reasons the Fed believes they can continue on the easy liquidity course, along with minimal wage pressure.


There's only a few exceptions, food, oil, and maybe a few metals (cooper is still anahliated, so is steel, and other actual industrial metals).


You're missing on Oil. It's not the Fed driving it. Or a weak dollar. The current fair price is something 80-90 a barrel. Everything else right now (the entire rise) is speculation and fear. Gasoline in particular is even higher than the oil price suggests it should be. Of course, there's also been record speculation (largely because people are betting options in the event of catastrophe with Iran).


I do agree with the Silver call, I put that on after it broke the 31 area. Right now I'd say there's a clear path back to the previous top around 42.

Feb 23, 2012 9:07PM
Wow..another impressive article Anthony....a race horse out of no-where, another perfect square hitting nail article. You've been writing so many good articles on.
Feb 24, 2012 7:27AM

Mirhaydari, publish a complete list of your holdings and positions, and we may start to see why you are writing articles like these....

Feb 23, 2012 5:59PM

I can't believe an "Investor" is promoting Gold when everyone knows it's a ticking time bomb of a bubble.


Want to fight inflation? Buy large Iconic Dividend paying company stock.

Second - you are buying paper not Gold - If every one tried to cash in it would be worthless.

Third - Funds in general are a rip off - you are just making your broker and the Fund company rich as they siphon off your earnings.


Wow, what's next a recomendation for bonds?

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