A Reader’s Opinion & Ian’s Response

I cannot remember if I shared with you why the Fed will taper to zero and in fact this will be more positive for gold than QE ever was. If QE was positive for gold, outside of manipulations, etc. gold wouldn’t have dropped from 1900 to 1200. I know many including a few that work with Eric believe that QE is gold positive yet I never have (and yes those others are much brighter than me) as it created the delusion of a Fed put for risk assets such as equities. Here’s the reason why QE is dead and the taper will take it to zero:
Aside from all the much talked about fiscal issues of the US, my reasoning for the death of QE has to do with the 2.6 trillion dollar UNDERFUNDED pension system here, since most pensions are 40%-50% in fixed income and that benefits are based upon an 8% annual return, pension managers “ladder” their fixed income portfolios generally over a 10 year period to reduce interest rate risk. Saying this, for the past 5 years interest rates have been pushed artificially low creating a massive problem for pensions (and their managers) since each year maturing bonds continue to be reinvested out on the yield curve at lower and lower rates exacerbating the issue that pensions cannot and will not reach their 8% annual returns ballooning the 2.6 trillion dollar shortfall to an even more unfathomable level. I know this really smart guy that said in a Kondratieff Winter Cycle pensioners will not receive what they were promised. So here we are. The Fed has realized there is no mechanistic link between QE and the economy (I’m not sure they didn’t originally believe that a “wealth effect” would cure all that ails the US, well it won’t obviously). Why should the end of QE be positive for gold? At some point it will be realized that gold is the only true safe haven.

I am not sure that I agree with you on this one. The bank balance sheets are stuffed with hidden toxic assets. The Fed is attempting to offset this by stuffing money into the banks, which they have used to speculate, principally in the stock market. So far that has worked by garnering the banks healthy profits, which can be used to offset some of this rubbish that they have on their books. Also the Fed is buying mortgage backed securities from the banks, taking that rubbish from them and transferring it to its own balance sheet. This is all going to come to an end as the stock bear market sets in. Never the less the Fed will continue to support the banks; after all they are the Fed’s masters. Thus the Fed is caught between a rock and a hard place, but its choice I think will be to support the banks at the expense of the pensioners. That will ultimately, in my opinion, lead to the Fed’s demise.

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