Gold and the End of QE2

After months of consolidation, gold has rallied to make new all-time highs. Depending on your position size, $1320, $1350, and $1375 were points to add. I nibbled above $1320, but missed $1350. No problem: I have a very healthy long position and I am not inclined to get leveraged here.

That being said, I will add on this breakout. I’ve previously noted that in bull markets double, triple, and quadruple tops are useless technical indicators. In fact, multiple failures to breach resistance increase the likelihood of an eventual break out. I will probably close out on a failed breakout somewhere between $1400 and $1420.  These moves are meant to crush those without discipline: don’t make the mistake of going on leverage without stops. The profits will take care of themselves without leverage.

We are nearing the period last year that ushered in a rally that totally caught people by surprise. If you recall, a steep correction in February resulted in heavy losses for gold investors. Sentiment was near Fall 2008 levels and people were talking about another 80% crash in gold stocks. I stated at the time that it was not very likely for us to see another forced selling event of that magnitude. That was a once-in-a-generation type panic sell-off that you just had to recognize at the time.

Let’s get this out of the way- the S&P is not going to 100. In the severe stagflation of the 1970′s, stocks also collapsed in a very short period of time. After a monster rally, stocks fell once again but still remained at least 25% above their 1974 lows. In a pure fiat system, you are not going to see Depression-style double crashes as long as the government is determined to print. So many companies that should have gone to $0 have regained some semblance of profitability due to massive taxpayer bailouts. Of course our public balance sheet is now one huge mess, but this is separate from the stock market–for now.

QE3?

The long-term effects of taking on so much private debt onto our balance sheet will be frightful. In the near-term, a halt to the Fed’s program of quantitative easing would be bearish for stocks. I think the chances of the program being suspended permanently are very small. QE may be suspended for 6 months or so, but not permanently- the repercussions will be too large. This is something Bill Gross suggests in his latest piece.

The chart below from PIMCO shows how the composition of debt purchases has changed dramatically. The Fed is now the primary buyer of Treasuries. Has anyone in government asked who will buy our debt when QE2 ends? Has anyone asked what the effects will be on the economy if short and long rates rose substantially? This is the elephant in the room until June. Where do you want to be hiding before then? Would you rather be in U.S. Treasuries, the dollar, or gold?

2011 is lining up to be a very important year. We should be seeing the demise of municipalities and more civil unrest. People will realize that quantitative easing is a never ending story and they will react accordingly. The situation in states is not improving. The situation at the Federal level is not improving. Pension and Medicare liabilities are rising. Where does this all end? How does gold not rocket launch when people wake up from their self-imposed slumber? There is not much time left; as always, gold will be your leading indicator.

Source: Gold and the End of QE2