Jul 13, 2011

Gold is hitting record prices both yesterday and again today as it nears $1600/oz. Silver is following today, up $2 (at the moment) to over $38/oz. This price move comes as Fed chairman Bernanke is considering buying up more Treasury bonds.

http://money.cnn.com/2011/07/12/markets/gold/index.htm

NEW YORK (CNNMoney) -- Gold jumped to a record high Tuesday after the minutes from the Federal Reserve's June policy meeting indicated the central bank might be open to more monetary stimulus....

The late-afternoon surge came after the minutes from the Federal Reserve's June meeting said "a few members" of the bank's Federal Open Market Committee said the bank "might have to consider providing additional monetary policy stimulus, especially if economic growth remained too slow to meaningfully reduce the unemployment rate in the medium run."

A month ago Bernanke announced that QE2 was going to end on July 1st. In other words, their "quantitative easying" policy (buying US treasury bonds) would end shortly. When I heard this, my reaction was: "Really?? So who is going to fund America's romance with debt? China?"

The fact is, China is now a net seller of US bonds. They buy a few but sell more than they buy. The only way to prevent a "failed auction" is for the Fed to step in and do the purchases. This has been done under QE1 and QE2 in the past year.

The only reason QE1 and 2 were necessary in the past was because other countries have largely stopped buying our debt. In fact, much of "foreign" buying has been due to our own Fed setting up foreign accounts to buy US Treasuries, making it appear that all is well with "foreign" purchases.

The problem was so bad that the Fed finally had to admit to funding the US debt itself. It then promised to abstain from QE3 as of July 1st, but without solving the underlying problem, there was no way to fulfill its promise without accelerating the collapse of the economy.

I now suspect that the latest Bernanke comment might be the final push to bring silver up past $50/oz, which seems to me to be the benchmark for the arms of silver beating out the head of gold (Dan. 2).

According to Harvey Organ's Gold & Silver Report (yesterday's article):

"The bankers did put up a fight but the physical demand is too great for them to handle as the entire world tries to engulf as much physical gold and silver as they can without much luck."

http://harveyorgan.blogspot.com/2011/07/problems-around-globe-intensifiesgold.html

I wonder what he might have to say after watching the prices spike today.