Michael Pento continues:

“There has not been an announcement or imminent threat of a new round of QE or LTRO form either the Fed or the ECB.  So I thought it would be a good idea to look at the Fed and ECB’s recent spate of money printing and its affect on the price of gold both during and after their counterfeiting sprees.

Massive monetary intervention started with the Federal Reserve in March of 2009 with the launch of QEI.  The Fed, at that time, expanded their relatively small mortgage buying program and promised to purchase $750 billion more in mortgage-backed securities....

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“Bernanke also announced he would ‘invest’ another $100 billion in Fannie and Freddie debt and purchase up to $300 billion of longer-term Treasury securities over a period of six months.  Their quantitative easing program, known as QE1, concluded in the first quarter of 2010 with a total of $1.25 trillion in purchases of mortgage-backed securities and $175 billion of agency debt purchases.

The price of the SPDR Gold Trust went from $90 to $109 during that period, which was an increase of 21%.  However, right after QEI ended in March of 2010, the gold trust increased at a slower pace, rising 6% over the following 5 months.

Then the Bernanke Fed followed with an announcement of their intention to launch QEII in August 2010, which was officially put into effect in November of that same year.  This second round of quantitative counterfeiting consisted of buying $600 billion in long-term Treasuries.

The Fed also announced it will reinvest an additional $250 billion to $300 billion in Treasuries with the proceeds of its earlier investments.  The bond purchases totaled $900 billion.  Thankfully for the middle classes and savers of the world, it ended in June 2011.  During that time frame the price of GLD went from $117 to $150, which amounted to an increase of 28%.

Likewise, just as what occurred the last time the Fed took a time-out from debt monetization, without any new monetary stimulus or significant increase in any central banks’ balance sheet, the price of GLD increased less dramatically over the next 6 months.  After briefly making a new high, one-half year after QEII ended it had increased by 8%.

Just six months after the Fed’s QEII ended, the European Central Bank stepped into the mix with its own quantitative easing called the LTRO.  The first round of long-term refinancing took place on December 21st, 2011 and amounted to 489 billion Euros, in which 523 banks participated.

At the same time, the ECB announced a second round of money printing would occur on February 29, 2012.  This second round of central bank loans came to 529 billion Euros, in which a total of 800 banks came with their hands out.  In just a few weeks the price of GLD had already increased by 10%.  But the very same day that the LTRO came to a conclusion, the price of GLD plummeted over 5%.

It is my view that without any new monetary stimulus on the horizon, the price of gold could trend slightly higher over the short term.  However, much like it has done in the past; it will still increase in price about 6-8% over the next few months because of the negative real interest rates that exist on both sides of the Atlantic.

There is currently an incipient recession occurring in Japan and Europe.  Meanwhile, the U.S. just posted very weak durable goods and ISM manufacturing data.  The notion that global GDP will remain unaffected by the removal of monetary stimulus is ludicrous.

The fact is that the developed world is now more addicted to artificially produced low interest rates and inflation than at any other time in history.  The debt load carried in Japan, Southern Europe and U.S. must be defaulted on either through inflation or an explicit restructuring.  In other words, those countries must choose between incurring a severe deflationary recession now or an inflationary depression later.

Therefore, if global central banks hold true to their history of an addiction to inflation, we should see another round of QE from the Fed and ECB announced by the end of this summer.  That should send gold surging higher by another 20-30% over the following 12 months.”

To Learn more about Michael Pento’s financial management services CLICK HERE. 

© 2012 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

Eric King

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© 2012 by King World News®. All Rights Reserved. This material may not be published, broadcast,

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