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Turk:  “We are still seeing some minor ripples from last week’s FOMC meeting, Eric, and the Fed’s non-stop jawboning about when they are going to begin tapering.  The next meeting is in December, which is the last one before Ben Bernanke hands over the reins to Janet Yellen....

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“The reality is that Bernanke had his chance to taper in September and fumbled that opportunity.  So it looks increasingly unlikely that there will be any tapering before he leaves office.  And when Ms Yellen takes over, it’s a whole new ball game.  She will be working with an economy that is rolling over, and confronted with a big divide in Washington regarding spending and the debt ceiling.

My expectation is that that QE will be increased in Q1 of 2014.  She, like most of the FOMC members, believes that they can control long-term interest rates with QE, and that low rates help the economy.  So even though it is clear that neither of these objectives are being achieved, I expect that she will try to keep the yield on the 10-Year Note below 3% with even greater amounts of Treasury paper being gobbled up with massive Fed buying.

The really important thing is that the yield on the 10-Year Treasury Note is inching back up.  The yield dropped slightly after last week’s FOMC announcement, but that respite was short-lived.  Yields have been in an uptrend since May, and this trend is likely to continue.

It is interesting to note that yields are following the same pattern that started with the May FOMC meeting.  Despite all the bond buying by the Fed which should create demand and therefore lower yields, the opposite is happening.  Yields are rising, and it is relentless.  It is happening slowly, but surely, like a powerful locomotive chugging away, which I think is a good way to describe what is taking place.

The locomotive is the market, and in the end markets are always more powerful than government intervention.  The locomotive is gaining momentum for the reason that I have been making since May, which is when the tipping point was reached.  Since then there have been more investors willing to sell government securities than the Fed or other central banks are willing to buy.  The consequence has been rising yields on the 10-Year Treasury Note.

But interest rates are not rising in spite of QE, instead, since May they have been rising because of QE.  Interest rates are just way too low and do not offset all of the risks associated with holding Treasury paper.  Therefore, Treasury paper is being sold, meaning that its supply is greater than the demand for this paper.

The reason why all of this so incredibly important is that everything is now in place for another crisis as we approach the February debt ceiling limit.  As a consequence, it is extremely critical that investors understand that they should absolutely not be holding dollars or Treasury paper.  They are incredibly overvalued and therefore they will be the ultimate losers here.  Physical gold and silver are the place to be, and can continue to be picked up at prices that reflect severe undervaluation.

Just before Nixon closed the “Gold Window” in the 1971 dollar crisis, Treasury Secretary John Connolly, speaking to the world, said "The dollar is our currency, but your problem.”  To paraphrase him today, he could be saying “Treasury paper is our debt, but your problem.”

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© 2013 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.

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Eric King

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