Just as the Fed’s announcement of QE3 came as no surprise to us, we’re also not mystified by the subsequent reactions of gold and the U.S. dollar.
Central bank stimulus, particularly the kind involving money printing, tends to boost gold and weigh heavily on the dollar. And that’s exactly what we’ve seen developing since July when we determined a third round of stimulus was (regrettably) inevitable.
Here’s my chart of gold, which is up almost 12% since late July…
Gold’s steep ascent over the past two months is inversely mirrored by an equally steep decline in the value of the U.S. dollar, shown here…
These recent moves will no doubt entice naïve investors to take new positions in both markets. But if investors are jumping onto these short-term trends, they’re likely to be caught wrong-footed in the long run.
We’re taking the long view, as we’ve always done.
That’s because we understand that the underlying, fundamental influence on the economy is demographics… NOT temporary, borrow-to-spend government stimulus.
Consider the fact that U.S. GDP in 2011 was roughly $15 trillion, or $1.25 trillion each month. Consumer spending represents about 70% of GDP, which means U.S. consumers are responsible for generating around $875 billion in economic activity each month.
That figure – $875 billion in monthly consumer spending – dwarfs the $40 billion in monthly bond purchases that the Fed will be pursuing. So what does this all mean?
A relatively minor contraction in consumer spending can easily negate the Fed’s stimulus. If consumers reduce spending by just 5% it will pull $44 billion out of the economy each month, washing out the $40 billion the Fed is pumping in. From what we know about the demographics-led slowdown in consumer spending patterns, it’s easy for us to see that the Fed is fighting a war it can’t possibly win.
Watch for the recent moves in gold and the dollar to be short-term, countertrend moves within a much larger, long-term demographics-driven downturn. Our long-term views remain bullish the dollar and bearish on gold.
If you haven’t done so already read the Survive & Prosper issue on “The Fed’s Predictable QE3 Move Will Fail.”
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