Thursday, April 28, 2011

To QE3 Or Not To QE3 and Mining Stocks vs. Gold

I have been arguing - since it became "in vogue" to believe that the Fed is done printing money on June 30th -  that the Fed would indeed continue printing, in some form or another.  To me, the most revealing comment in yesterday's FOMC statement was this: 
[The Fed] prepared to adjust those holdings as needed to best foster maximum employment and price stability
I don't know about anyone else, but I think it would be a mistake to read "adjust" to mean that the Fed would "reduce" its portfolio.  To begin with, we know that Bernanke, and Vice Chairman Yellen, has stated repeatedly and explicitly that the Fed's number 1 goal is employment growth. NY Fed Chair Dudley has said that even growth of 300,000 jobs per month is not enough to pick up the slack.

Then we get today's economic evidence:  Q1 GDP estimate was well below the consensus Wall Street Einstein forecast and is showing quick deceleration in the Fed/Obama stimulus-fueled small "hop" in economic growth AND jobless claims on a weekly basis are trending higher again.  Also, despite the Goverment-manipulated jobs reports showing a declining unemployment rate, we know for a fact that buried in that same report is a continued decline in the size of the labor force, because people have given up looking. I know of several in that category.

And then we get this little "gem" from Walmart's CEO (Money magazine, sourced from 
Wal-Mart's core shoppers are running out of money much faster than a year ago due to rising gasoline prices, and the retail giant is worried, CEO Mike Duke said Wednesday...they're "running out of money" at a faster clip, he said.  "Purchases are really dropping off by the end of the month even more than last year," Duke said. "This end-of-month [purchases] cycle is growing to be a concern.
Here's the article:  LINK  Who are you going to believe when you read what's being said about the economy?  The Government people who sponge off the taxpayers or a private-sector businessman who gets paid based on how well the economy is really doing?  I know my answer.  Also, if you parse thru the GDP report released today, you see the consumer fueled most of the 1.8% estimated growth.  This is very problematic because I can guarantee you that non-food/energy consumer consumption will be largely wiped out by $4/gallon gas.  The Government will have to spend more money to pick up that loss and that will mean even larger deficits that have to financed with money printing from the Fed.

And then there's this, sourced from  a Gallup Poll shows that 55% of Americans believe the economy is in a recession or depression, vs 27% who think the economy is growing.  I can guarantee you that a good portion of that 27% likely work for the Government in some capacity and their paychecks are funded with prining press economics, not REAL economics.  Here's the LINK

Bottom line for me is that all the evidence, including words from the FOMC policy statement released yesterday, point toward a reality that shows either  the Fed continues to print money and expand its balance sheet or the Government loses a substantial source of funding and the economy collapses.  Got gold?

Speaking of gold, for all of those pulling their hair out over a perceived underperformance in the mining shares vs. the performance of gold/silver, please take a look at this chart which shows the performance of the HUI index (15 unhedged large-cap mining stocks) vs. gold for the last 2 years.  This chart shows us that since last February, the trend has been that mining stocks are indeed outperforming the metal:

This chart also suggests that the mining shares have a LOT of room to move higher relative to gold, and I do expect the mining stocks in general to start making some big - albeit volatile - moves higher soon.


  1. Hi Dave in Denver,

    What do you think about Silver and Silver Miners? Silver miners have been lagging recently compared to silver prices. Thanks advance for your answer. Leilani

    BTW - I really like the two photos on your blog. I am a powder hound too.! I am in California so I am use to Sierra Cement. I have skied several times in Colorado and it is the best! High altitude, cold, and dry… Best ingredients for good skiing. Never tried cat skiing. Like to one day. Heard there is great cat skiing in Canada too.

  2. Next time you are in Colorado, if there's good snow go do Power Addiction based out of Winter Park. It's awesome snow-cat skiing on Berthoud Pass. My brother-in-law operates it and he's a blast to ski with.

    I think the silver miners were telegraphing last night's criminal ambush on silver. I think it will be short-lived and dip-buying anything silver will be rewarded handsomely between now and two years from now. The fraudulent manipulation will get worse, so if you don't like volatility, just keep moving cash into physical gold and silver on every pullback.