{"id":910,"date":"2012-09-15T10:49:27","date_gmt":"2012-09-15T10:49:27","guid":{"rendered":"http:\/\/teekhapan.wordpress.com\/?p=910"},"modified":"2012-09-15T10:49:27","modified_gmt":"2012-09-15T10:49:27","slug":"why-you-should-be-nice-to-your-mom-and-buy-some-gold","status":"publish","type":"post","link":"https:\/\/vivekkaul.com\/2012\/09\/15\/why-you-should-be-nice-to-your-mom-and-buy-some-gold\/","title":{"rendered":"Why you should be nice to your mom \u2013 and buy some gold"},"content":{"rendered":"

 
\n\"\"<\/a>
\nVivek Kaul<\/strong>
\nSo let me start this piece by admitting Ben Bernanke, the Chairman of the Federal Reserve of United States (the American central bank) has proven me wrong.
\nI was wrong when I recently said that the Federal Reserve would not initiate a third round of quantitative easing (QE), before the November 6 presidential elections in the United States. (you can read about it\u00a0here<\/a>).
\nBernanke announced late last night that the Federal Reserve would buy mortgage backed securities worth $40billion every month. This will continue till the job scenario in the United States improves substantially. The Federal Reserve will print money to buy the mortgage back securities.
\nI concluded that the Federal Reserve wouldn\u2019t announce any QE till November 6, primarily on account of the fact that Mitt Romney, the Republican nominee for the Presidential elections, has been against any sort of QE to revive the economy.
\n\u201cI don\u2019t think QE-II was terribly effective. I think a QE-III and other Fed stimulus is not going to help this economy\u2026I think that is the wrong way to go. I think it also seeds the kind of potential for inflation down the road that would be harmful to the value of the dollar and harmful to the stability of our nation\u2019s needs,\u201d Romney told\u00a0Fox News<\/em>\u00a0on 23 August. This had held back the Federal Reserve from initiating QE III.
\nBut from the looks of it Bernanke doesn\u2019t feel that Romney has a chance at winning and that he is more likely than not going to continue working with Barack Obama, the current American President.
\nThis round of quantitative easing is going to help Obama and hurt Romney. Let me explain. The theory behind quantitative easing is that when the Federal Reserve buys mortgage backed securities (in this case) by printing dollars, it pumps in more money into the economy. With more money in the economy, banks and financial institutions it is felt will lend that money and businesses and consumers will borrow. This will mean that spending by both businesses and consumers will start to up. Once that happens the economic scenario will start improving, which will lead to more jobs being created.
\nBut as I said this is the theoretical part. And theory and practice do not always go together. Both American businesses and consumers have been shying away from borrowing. Hence, all this money floating around has found its way into stock and commodity markets around the world.
\nAs more money enters the stock market, stock prices go up and this creates the \u201cwealth effect\u201d. People who invest money in the market feel richer and then they tend to spend part of the accumulated wealth. This, in turn, helps economic growth.
\nAs Gary Dorsch, an investment newsletter writer, said in a recent column, \u201cHistorical observation reveals that the direction of the stock market has a notable influence over consumer confidence and spending levels. In particular, the top 20% of wealthiest Americans account for 40% of the spending in the US economy, so the Fed hopes that by inflating the value of the stock market, wealthier Americans would decide to spend more. It\u2019s the Fed\u2019s version of \u201ctrickle down\u201d economics, otherwise known as the \u201cwealth effect.\u201d\u201d
\nWhen this happens, the economy is likely to grow faster and hence, people are more likely to vote for the incumbent President. As Dorsch explains \u201cIncumbent presidents are always hard to beat. The powers of the presidency go a long way\u2026In the 1972 election year, when Nixon pressured Arthur Burns, then the Fed chairman, to expand the money supply with the aim of reducing unemployment, and boosting the economy in order to insure Nixon\u2019s re-election.\u201d
\nBernanke is looking to do the same, even though he has denied it completely. \u201cWe have tried very, very hard, and I think we\u2019ve been successful, at the Federal Reserve to be non-partisan and apolitical\u2026We make our decisions based entirely on the state of the economy,\u201d the\u00a0Financial Times\u00a0<\/em>quoted Bernanke as saying. Given this, Romney has been a vocal critic of quantitative easing knowing that another round of money printing will clearly benefit Obama.
\nOther than Obama and the stock markets, the other big beneficiary of QE III will be gold. The yellow metal has gone up by around 2.2% to $1768 per ounce, since the announcement for QE III was made. In fact the expectation of QE III has been on since the beginning of September after Ben Bernanke dropped hints in a speech. Gold has risen by 7.3% since the beginning of this month.
\nThis is primarily because any round of quantitative easing ensures that there are more dollars in the financial system than before. The threat is that the greater number of dollars will chase the same number of goods and services. This will lead to an increase in their prices. But this hasn\u2019t happened till now. Nevertheless that hasn\u2019t stopped investors from buying gold to protect themselves from this debasement of money. Gold cannot be debased. Unlike paper money it cannot be created out of thin air.
\nDuring earlier days, paper money was backed by gold or silver. When governments printed more paper money than the precious metals backing it, people simply turned up with their paper at the central bank and government mints, and demanded that paper money be converted into gold or silver. Now, whenever people see more and more of paper money being printed, the smarter ones simply go out and buy that gold. Hence, bad money (that is, paper money) is driving out good money (that is, gold) away from the market.
\nBut that\u2019s just one part of the story. The governments and central banks around the world, led by the Federal Reserve of United States and the European Central Bank, are likely to continue printing more money, in the hope that people spend this money and this revives economic growth. This in turn increases the threat of inflation which would mean that the price of gold is likely to keep going up. \u201cGold tends to benefit from easy-money policies as investors utilize the precious metal as a hedge against potential inflation that could ultimately result from the Fed\u2019s policies,\u201d Steven Russolillo, wrote on WSJ Blogs.
\nMarket watchers have also started to believe that the Federal Reserve is now only bothered about economic growth and has abandoned the goal of keeping inflation under control. Growth and inflation control are typically the twin goals of any central bank.
\n“They are emphasizing the growth mandate, and that means they don’t care about inflation other than giving lip service to it,” Axel Merk, chief investment officer at Merk Funds, told\u00a0Reuters<\/em>. \u201cThe price of gold will do very well in the years to come,\u201dhe added.
\nSomething that Jeffrey Sherman, commodities portfolio manager of DoubleLine Capital, agrees with. \u201cThe Fed’s inflationary behavior should be bearish for the dollar in the long run and drive investors to seek protection via the gold market,\u201d he told\u00a0Reuters<\/em>.
\nAlso unlike previous two rounds of money printing there are no upper limits on this QE, although at $40billion a month it\u2019s much smaller in size. QE II, the second round of money printing, was $600billion in size.
\nSomething that can bring down the returns on gold in rupee terms is the appreciation of the rupee against the dollar. Yesterday the rupee appreciated against the dollar by nearly 2%. This is happening primarily because the UPA government has suddenly turned reformist.\u00a0 (To understand the complete relationship between rupee, dollar and gold, read\u00a0this<\/a>).
\nIn the end let me quote William Bonner & Addison Wiggin, the authors of\u00a0Empire of Debt \u2014 The Rise of an Epic Financial Crisis<\/em>. As they say \u201cThere is never a good time to die. Nor is there a good time for a crash or a slump. Still, death happens. Be prepared. Say something nice to your mother. Offer a bum a drink. And buy gold.\u201d
\nSo be nice to your mother and buy gold.
\nDisclosure: This writer has investments in gold through the mutual fund route.
\n(The article originally appeared on www.firstpost.com on September 15,2012.\u00a0http:\/\/www.firstpost.com\/investing\/why-you-should-be-nice-to-your-mom-and-buy-some-gold-456915.html<\/a>)
\n(Vivek Kaul is a writer. He can be reached at\u00a0vivek.kaul@gmail.com<\/a>)<\/p>\n","protected":false},"excerpt":{"rendered":"

  Vivek Kaul So let me start this piece by admitting Ben Bernanke, the Chairman of the Federal Reserve of United States (the American central bank) has proven me wrong. I was wrong when I recently said that the Federal Reserve would not initiate a third round of quantitative easing (QE), before the November 6 … <\/p>\n

Read more<\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"qubely_global_settings":"","qubely_interactions":"","_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[2,31,33],"tags":[164,428,444,1021,1251,1389,1447,1740,2325,2893,3081,3858,3997],"qubely_featured_image_url":null,"qubely_author":{"display_name":"Vivek Kaul","author_link":"https:\/\/vivekkaul.com\/author\/vivekkaul\/"},"qubely_comment":0,"qubely_category":"Analysis<\/a> Financial Crisis<\/a> Firstpost<\/a>","qubely_excerpt":"  Vivek Kaul So let me start this piece by admitting Ben Bernanke, the Chairman of the Federal Reserve of United States (the American central bank) has proven me wrong. I was wrong when I recently said that the Federal Reserve would not initiate a third round of quantitative easing (QE), before the November 6…","jetpack_sharing_enabled":true,"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/posts\/910"}],"collection":[{"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/comments?post=910"}],"version-history":[{"count":0,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/posts\/910\/revisions"}],"wp:attachment":[{"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/media?parent=910"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/categories?post=910"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/tags?post=910"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}