Gold has hit an all-time nominal high of $1,500 per ounce. Silver has hit $45 per ounce, just short of its all-time bubble high of about $50. For those who have been paying attention, it does not come as a surprise. The Fed has tripled the adjusted monetary base in the last few years and the federal government has been adding about $1.5 trillion in new debt each year for the last couple of years. The worst thing (and the best thing for gold) is that there is no sign of this madness stopping.
Yesterday, there was a piece on LRC featuring an interview with David Galland. Galland is part of Doug Casey’s group at Casey Research. If you haven’t read this interview, it is definitely insightful. To sum it up, Galland is warning that there could be a big policy shift in the short term. While his long-term outlook has not changed (more inflation and higher commodity prices), he thinks there could be a pullback in the not-so-distant future.
While I’m not making any predictions, I think his analysis is reasonably sound and I think the scenario he outlines is not only possible, but reasonably likely. Galland is saying that there will be no QE3 this year. He is expecting an announcement, perhaps following the FOMC meeting at the end of April, that the Fed will stop buying government debt. The Fed will either cut QE2 short or just let it play out but not buy any more after that. Just such an announcement could cause a big pullback in the stock market. It would also likely strengthen the dollar. In turn, gold and silver could see a sharp pullback.
I would give this scenario at least a 50/50 chance of happening right now. I agree with his assessment that if the Fed does announce that it will stop buying, then we will see a significant pullback. Unfortunately, it is hard to predict what the Fed will do. I have already been surprised at just how much the monetary base has increased, so I shouldn’t be shocked if the Fed does do something as stupid as QE3.
Regardless of what happens, Galland believes that the long-term trend will hold. If the Fed does hold off on QE3, then it will just come later after the economy goes through another round of beatings. If Galland’s short-term prediction doesn’t hold and the Fed starts QE3 right after QE2, then expect gold, silver, and oil to go to the moon faster than even goldbugs could have imagined.