Gold took a beating Friday, closing down more than 4%. That’s the biggest one-day decline in 21 months.
The sell-off was sparked by a better-than-expected jobs report. Understandably, some readers may be scratching their heads at the following equation:
more jobs = lower gold prices
How could that be? Because Wall Street interpreted the jobs data as confirmation that we’ve turned the corner. If the Fed doesn’t have to print more money, inflation will be tamer. And since gold is essentially insurance against Armageddon and inflation… it fell.
It’s a bit early to be declaring victory, though. The real test comes when the Fed starts tightening. They are propping up housing and stock markets via massive asset purchases (mortgage-backed securities and the like). And that’s not going to change any time soon, with 25% of homeowners underwater on their loans…
There’s simply no way the Fed can stop propping up the market. The wave of option ARM and Alt-A liar loan resets doesn’t peak until 2013. Take a look:
f the current government programs are allowed to expire, the market reaction will be violent. And our economic leaders have shown that they’re willing to do almost anything to prop up the markets.
For example, what would happen to the housing market if the Fed stopped buying all that Freddie and Fannie debt? (Debt to the tune of $1.25 trillion to be bought up by April, when the current plan is set to expire.)
Well, there would be no market for mortgages, and rates would shoot up. Housing prices would collapse and defaults would skyrocket.
So will the Feds let this happen? Doubtful. They’ll step in and attempt to fix the economy. And we know how they “fix” things: more debt, more printing… Inflation is inevitable.
Those betting on a quick and sustainable recovery will be disappointed. And I’ll take the other side of that bet, when the time comes.
It’s also worth noting that the jobs report wasn’t even that great: 52,000 of the jobs added were temporary positions, brought in for the holiday rush. An increase in temp jobs sometimes signals the start of a rebound in employment. Those workers are let go in January and February… it happens every year.
Another issue is that the November unemployment data is preliminary. How many of us were happily surprised by Q3’s 3.5% GDP growth, only to see it revised to 2.7%?
Inviting Inflation
The bottom line is that Bernanke and crew actually want inflation. It’s easier than the alternatives: raising taxes or slashing spending. And it will help erase debts. It will also wipe out the savers and reward the borrowers — but that seems to be the path we’re on, like it or not.
Besides, do you really think they will allow America’s debt to be paid off with dollars worth more rather than less?
Of course not. Devaluing our currency and printing money are part of a strategy. A reckless and morally hazardous one, but still a strategy.
So that’s why I still am bullish on precious metals. I’m hoping for a nice pullback in gold and silver. It’ll be a great buying opportunity. Once everyone realizes that the Fed’s printing presses are just getting warmed up, it’ll be off to the races again.
I’ll be looking to snap up some junior gold miners on a pullback. If you’re looking for specific names, my colleague Greg McCoach is one of the best in the business. He uncovers tiny miners with big potential, including one company whose stock launches 2% for every 1% gold prices jump. He calls it “gold’s doubling effect” — and you can read more about this profit opportunity right here.
Until next time,
Adam Sharp
Analyst, Wealth Daily
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