QE can never end – and Janet Yellen knows it

Janet Yellen © Getty images
Janet Yellen isn’t fooling anyone

The markets got quite excited about incoming Fed chief Janet Yellen’s inaugural appearance in front of Congress this week. And I have to confess – through morbid fascination, I watched the whole thing over a live webcast.

As always, it’s not quite what she said that gee’d the markets up (especially gold) – it’s more what she alluded to.

And what she alluded to was that the economic recovery is by no means in the bag. That while it is her intention to continue with this tapering bluster, the fact is that the policy could be reversed at any time.

This all fits very neatly in with my personal prediction about what these powerful central banks are up to. I’ve said it before and I’ll say it again, quantitative easing (QE) is going nowhere.

Yellen’s speech was all about buttering up the banks – buttering up the markets – and most importantly, making sure the government has enough cash so they can spend with impunity.

It’s little wonder the markets – and specifically gold – reacted positively to the show. Yellen was telling them everything they wanted to hear. She knows that the Fed can’t take the amphetamines out of the punchbowl just yet. Not without causing an almighty mess.

Today, I want to look at the beautifully choreographed moves the Fed is making to keep the QE charade going, and what’s happening now that the markets have noticed.

The cat is out of the bag

Should we feel sorry for Yellen? I mean, she stepped into the Fed’s chair just as the painful effects of QE tapering were taking effect. The pains of the emerging markets are drawing closer to home as stock markets have tumbled over weeks.

Feel sorry for her? No chance. Yellen has been involved with Fed policy for many years. She was the vice chair for the last four years – and deeply involved in the Fed for at least ten years.

She’s very much a part of the broken banking system at the root of what’s wrong with the world.

I sometimes wonder why the Fed, and for that matter our own monetary policy committee, bother with the charade. The supposedly considered policy meetings, the well-rehearsed submissions to parliament, or the guys on Capitol Hill.

I mean, we all kind of know that what the central banks want to do. It’s what the planners always do – they want to pursue loose policies to artificially stimulate the economy and stimulate government spending. The only thing is, they have to make it look like they’ve got a plan and are acting prudently.

To make things look straight and above-board, they offer ‘guidance’ – you know, things like, “We will start to raise rates once unemployment falls to a certain level”. In the case of the States, it was 6.5%, in the UK, 7%. “We’ll tighten up policy just as soon as it’s safe to do so.”

Yeah, right.


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Don’t like the game? Just change the rules

And wouldn’t you know it, now that unemployment is just at the cusp of reaching its ‘guidance’ level, both these powerful central banks have come out and changed the rules.

Yes, this week, Mark Carney joined Yellen in moving the goalposts. Carney said words to the effect of: “Oh, don’t worry about all that guidance stuff we talked about in the past. Even if unemployment falls back to 7%, we’ll keep rates on hold for years anyway!” The Fed’s promise was similarly batted away.

You just know what the plan is here. Keep rates low. Keep the banks in clover and jolly up the markets, and if there’s some sort of a crash, then use it as an excuse to slap on more QE.

But the serious players in the financial markets are starting to see the plan. And that’s good for gold.

The market is nobody’s fool – gold miners soar 25%

Ever since this silly tapering talk hit the newswires, the effect on gold has been staggering.

Gold crashed. And that’s fair enough. After all, the multi-year rally in gold was in many ways down to all this unconventional monetary policy. Given the perception of QE to infinity, gold went stratospheric.

So, when the recent talk of reining in QE came to light, it took many of the gold bulls by surprise. Hmm, didn’t see that one coming!

But right now, the gold market is back on form. Having spent Christmas in the doldrums, gold is trading back over $1,300. That’s up about 8%. And as for the miners – they’re up nearer 25%. Good job I recently decided to top up on my miners.

This is all down to the central banks reaffirming their intent to pursue ultra-loose monetary policy. It’s what I like to call the ‘tapering con’. You’ve heard it from me before – what it essentially means is that the central bank’s cash boosters are going absolutely nowhere.

Of course, they don’t make it easy for you. They don’t come straight out and say it. They shilly-shally around pretending they’re pursuing one policy, then back down and go the other way.

But I believe the markets are waking up to the ruse. And so are we at The Right Side.

It’s business as usual at the central banks. So, place your bets accordingly.

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22 Responses

  1. 14/02/2014, 4caster wrote

    Bengt, you’ve censored a paragraph from near the end of your email, and I quote:
    ‘To be fair to Simon Popple, he called this right at the bottom. He called gold miners the “contrarian play of the decade” in November last year. He’s a happy man at the moment! I think there’s a lot left in that trade – if you agree with me, click here to read more about it.’
    In fact Simon Popple called the bottom of the gold bear market many times before November, including his email which he wrote in 12th April 2013: ‘The greatest gold opportunity for 25 years?’ Between 12th and 15th April gold fell from $1561 to $1348, and the rout continued to $1192 on 28th June. The XAU Gold mining shares index fell from 136 on 12th March to 80 on 15th December, 8 months after he called the bottom. A happy man? He should have been given the Order of the Boot.

  2. 15/02/2014, chazza wrote

    Stick to the truth: Simon Popple called the bottom of the gold market well before it happened. I bought into the service and bought a fully diversified portfolio of all his recommendations. I sold out not long after to limit my losses and the shares he recommended are still showing losses of 40% to nearly 80%.

    I bought back recently – a slightly different selection of shares – and am pleased with their progress.

    Timing is everything otherwise we would be buying stocks indiscriminately and waiting for something to turn up.

    • 15/02/2014, dialucrii wrote

      I also subscribed to Simon Popple’s newsletter and subscribed to many of his tipped shares, along with those of another research letter. Unlike Chazza, I was not shaken out of my shares because I understood that gold was not falling because Popple was wrong on the fundamentals for gold or his technical analysis, but because the price was being manipulated. You can trott out the usual “that’s just a conspiracy theory” nonsense all you want, but the fact is that against the background of global money printing no a scale never before seen by mankind it is simply illogical that the gold price should fall. Add to that the incredible increase in world demand that has added more than a third to global demand and then ask yourself what asset could possibly drop in price when demand for it has increased by 50-100%!! why have the premiums being paid in the east risen to levels much higher than the spot price for physical?

      The fixing of Libor, Forex, ISDA, mortgage rates, energy rates, all said to be conspiracy theories until it turned out they were being fixed after all. Given the barometer against currency strength that gold represents (particularly the dollar), it becomes common sense that of all the markets to manipulate it is essential that the gold price be kept down as much as possible for the world’s central banks to keep up the pretence of a “recovery”.

      When you understand that entities have many motives to do something, that they also have the power to do something and then it looks like that that thing is happening against all possible logic, what other conclusion can you reach?

      Gold price manipulation has a finite life and I’m happy to wait for those doing the deed to run out of steam (deliverable gold) which may already be happening. Then, we will see gold rise to the price it would have been but for the manipulation and for the all the reasons given above that wlll be much higher than current prices and also much higher than those at which Popple tipped these stocks. I am down around 50% from where I got into these shares but I know they will bounce back and then some.

      All popple is guilty of is underestimating how desperate our central banks are to keep the gold price down and how long they could do it for. GIven that the reasons we are in gold is because the world’s economy is in uncharted territory, I think that is understandable.

    • 16/02/2014, FR wrote

      To be honest people should not be looking for fortune tellers. There are great stories out there but when they set a time frame then it puts me off, as in the end getting it right is just left to luck. I had investments which took 5 years to be fruitfull, even after a crash of 60%. Off course I would have made more money on the same period if i had a savings account paying 2% …

      • 17/02/2014, 4caster wrote

        So are you saying we should take no notice of the recommendations of MoneyWeek’s analysts? In that case, why do you bother reading them?

        • 17/02/2014, FR wrote

          As I said there are great stories out there and some of them I get from moneyweek. What is not reasonable is suggesting that an event X or price Y will occur within a year. Not only you get disappointed but also it may lead you to an early sell triggered by expections not being met rather than change of fundamentals.

          Just my 20 cents for what is worth anyway

          • 17/02/2014, dialucrii wrote

            @chester

            I actually thought about cancelling my subscription a few months back but realised that there is nothing wrong with having the ideas that MW presents presented to me, so long as I know how much weight to attach to those ideas. So while I think MW can only ever be shallow and short-termist in it’s discussions and recommendations (as a weekly magazine it must continually come up with new “plays” in order to fill its pages. If you followed each of their plays you’d be buying 10 new stocks a week, hardly practical, would it be better monthly?) it shouldn’t be written off as a source of investment ideas worthy of further exploration, so long as you don’t accept any of those ideas as gospel on their own merit.

            MWs must sell X-pages of new and interesting information every week, it being a weekly magazine. If deep down its writers felt that their investment advice would be one sentence long – “hold gold, stay out of equities” and that did not change from month to month, they would not be able to say that. They must give investment advice and opinion based on small windows of investment, windows so small as to be impractical for any investor to keep pace.

            They work well as a brainstorming tool for investment themes but nothing more IMHO. That and entertainment.

            I don’t mean that as a criticism of anyone at MW, simply that their remit prevents them from giving the same old repetitive advice, even if that is what they think applies.

  3. 15/02/2014, dialucrii wrote

    I should also add that Moneyweek are absolute cowards for not sticking to their guns on gold as an investment, instead bottling it down to “insurance” status. It used to be the job of our press to uncover market manipulation and other such scandals but these days the mainstream media does not enjoy free press. One you realise that most f the world’s media is owned by the same huge entities that fund governments into power who in turn enjoy “suitable” legislation from that government. Again, call it a conspiracy theory all you want but i simply following the well known principle of life that we tend not to bite the hand that feeds us.

    The mainstream media will eventually discuss market manipulation of gold but only when they can no longer avoid doing so due to it becoming common knowledge in the public domain. Those who follow only MM will be up in arms whereas those who inform themselves from more reliable sources will be saying ” I told you so” but labelled the squirrels who found a nut. Those who bombed out of gold because JPM/Goldman sachs predicted it would continue dropping in price will be devastated at the cost of getting back into it.

  4. 17/02/2014, r wrote

    Following on from what @dialucrii wrote:

    I am amazed that there is still such a demand for the printed word ie. the national press.

    I gave up wasting money on newspapers over 40 years ago and haven’t missed anything.

    It is the general buying public that give the press the power it has.

    r.

  5. 17/02/2014, dialucrii wrote

    @ “r wrote”

    I agree. It’s very frustrating to hear my friends and relatives spewing out “facts” they’ve picked up from the “news” (read mainstream media, BBC, Sky, CNBC, Bloomberg etc as I think TV and its rolling news coverage is now a far bigger news “source” for the public these days than the printed word). I don’t disparage them in anyway as I myself used to believe that what you hear on the news must be the truth because al channels are saying the same thing. It’s only once you realise who controls the media, what their motivations might be and just how much power they have to act on them that you start to question the MM more. I’m not saying they are always presenting lies, just that it is often in their interests not to present the whole truth and, where that is they case, they don’t. If they get caught out by facts that come out in the end, they present the true version of events as though they have got to the bottom of some conspiracy to hide it, so preserving their own dignity.

    The world needs a wake up call. The majority of the public hold an unfettered belief that those in power will do what is right and have a frankly embarrassing obsession with celebrities at the expense of real life issues. I would love to think that people will wake up one day and smell the coffee but sadly I expect that any wake up call will come too late for our economy and society as it stands. This might be a good thing in the long run as there is a great deal wrong with both at present, but times will be tough in the interim, especially if people continue to believe that we are “in a recovery” and are not preparing for what is really coming.

  6. 17/02/2014, Chester wrote

    If central bank policy and QE directly influences the price of gold, how is it that gold rose in lock step with growth in the Fed’s balance sheet under QE 1 & 2, but is negative under QE3?

    Gold’s price movement has followed the classic pattern of rise and correction based on swings in social mood, not the actions of Yellen or Carney – if it did, gold would be over $2500 today, based on a Fed BS of $4 trillion

    It isn’t, and is undergoing a predictable bounce after a long overdue correction from it’s all time high. Chances are that it will fall to around $400 by the time it finds a real bottom, despite Yellen frantically swelling her BS into oblivion trying to prevent collapsing equity prices and a deflationary bust

    • 17/02/2014, dialucrii wrote

      @Chester

      I genuinely mean this with the greatest respect as I myself knew little of the precious metals markets until a few years ago, but you clearly don’t know much about these markets.

      QE – You are bang on the money – QE SHOULD see gold rise as gold represents the inverse of the value of the dollar, it being valued in dollars. If you print more dollars the value of the dollar is decreased, therefore increasing gold’s value when priced in those dollars.

      What has been happening for many years and very heavily over the last few years, is that the PAPER price of gold (by which the physical price is set) has been artificially manipulated lower by the bullion banks selling massive amounts (eg 400 tonnes) into the market during illiquid Asian trading hours (and often in the space of seconds). No one sells this much volume into a market in one go rather than increments, and at the least liquid time of the market, unless they do not care about getting the best price and simply wish to move the price lower by design. By doing so in one lump some, many technical fund sell points are triggered, thus pushing the price down further. This is what we saw during the last few big drops in the gold price and the buying/selling activity involved is public information.

      One of the biggest banks involved in this is JPM Morgan who currently hold a 21% corner in the gold market and, from memory, around 14% in the silver market. When you hold that much of a corner in any market, you can decide which way the price goes, it’s as simple as that.

      Why would they want the price to go lower? One rational explanation would be the £3 billion they made last year selling at higher prices and buying back at the lower prices they caused in the market with their lump selling. Another would be that since strong gold reflects a weak dollar and vice versa, and since the dollar is on its last legs, a stage all fiat currencies eventually reach, JPM Morgan are being instructed by central banks (FED and BIS possibly) to engineer these price declines, keep the gold price low and the dollar from crashing and generally promote the idea that there is a “recovery”, when every legitimate statistic would suggest otherwise.

  7. 17/02/2014, dialucrii wrote

    @chester cont:

    apologies for the rant but I really hope I can help you see what is going on here.

    As you have pointed out, gold has dropped in what will at least in part have the appearance of a correction in the market. But then why would the correction come now when currencies around the world are being printed out of existence? Why would it have come last year when the world’s demand for physical increased by 50-100%?

    Gold will not drop to $400 for any length of time. Firstly it is too far below the cost of getting gold out f the ground ($1000-$1200ish, depending on the jurisdiction and the mine itself). Secondly, it is only the west and central banks that are selling gold into the paper market. Those in the east are buying it and taking delivery of the physical asset. This has lead to a huge shortage of physical gold in the west (why can’t germany get their gold back? Why is no one allowed to audit fort knox etc?). If this movement of the physical asset from west (weak hands) to the east (strong hands) continues at current pace then we will see a short squeeze in the gold market and failure to deliver by one or many of the bullion banks. Just look at the drop in the comex inventories over the last year. The weak hands sold about 900 tonnes out of ETFs last year, which helped the price manipulation and the shortage of physical in the markets. That will not happen again this year.

    one reason the price may have been “allowed” to rise (and believe me, that is the case with a 21% market corner) is to try and stem the increases in demand and slow the movement of physical from west to east and avoid bullion market defaults. If the price is pushed much lower at any point from the levels we have seen recently, demand for physical will increase further still and virtually guarantee a default in a market for which there are over 100 people with a claim to each ounce of deliverable gold.

    Gold belongs at a much higher price due to the amount of money being printed and common sense tells you that. While the extend of the moves down in price will obviously have been exacerbated by the sentiment created among those who do not know it is being manipulated by the change of direction, sentiment has not been the cause of that change in direction and neither has the “risk on” nature of all the “recovery” propaganda.

    Governments and banks are currently in survival mode and by their very nature will do whatever it takes to survive. A simple look at the role gold has always and continues to play in the world economy, aswell as the number of markets now proven to have been manipulated, coupled with the price action in gold, and it all becomes fairly obvious that several entities have both the motivation and the power to manipulate the price lower as much as they can. Why wouldn’t they in their efforts to save their currencies and economies?

    Personally I am happy to scoop up as much gold and gold miners as I can while the prices are artificially low as I know that can’t possibly last, for the reasons given above.

  8. 17/02/2014, dialucrii wrote

    If you doubt any of the above, just ask yourself this – why is China, a nation with vast sums of dollar reserve, hording as much physical gold as it can, an asset that moves inversely to the the dollar? They can;t get rid of their dollar reserves without collapsing it. If they are worried about a collapse, what they could do is stock up on the one asset that is a direct hedge against it……also an asset that has proved itself as a prudent holding during any economic reset?

  9. 17/02/2014, dialucrii wrote

    At the risk of actually commenting on the article….:)

    FWIW, I think Yellen will continue to taper until the markets can take no more and siganal as such, then she will try the only thing left in her perceived arsenal- an even higher level of QE. Once the public realises that there is no viable exit strategy and that QE is here to stay, the dollar will start to collapse like a wet paper bag and there be huge moves into gold. Any attempts to suppress the price increase against even greater demand than we have at present (campaigns which the recent price increase may signal are already struggling), will require such a volume of naked short selling into the paper market as to guarantee a delivery default in the bullion markets.

  10. 17/02/2014, Ellen12 wrote

    I’m really struggling with the idea that QE can never end. QE, to my mind, represents an attack on the value of work and savings. It a redistribution of wealth upwards and it funds the ever growing size of the bloated state (the US, UK, Eurozone – all bloated). But QE, government selling treasury stock to the fed, at it’s core, is borrowing money from our children and grandchildren to pay for the things we want today, and then pricing those same children and grandchildren out of important asset classes like housing. At a time when wages are being held down, QE is responsible for huge asset price inflation just when we need some form of deflation. I hope you are wrong and Yellen and whoever is in the White House will not stand by and allow ever more inequality evolve by attacking labour and real productivity in the way QE does.

    I must admit I hadn’t anticipated the current upward trajectory of every asset from equities to property to precious metals. But the world is awash with US dollars right now. It’s just surprising anyone would want to hold their government bonds – but I suppose pension funds and the like are forced to have them. Tightening monetary policy is a brave decision and it is going to have to be taken at some point to protect the value of the currencies we use, or nobody will bother getting out of bed to go to work, but people like Benanke, Yellen, Draghi and Carney are not the people to take this hard decision.

  11. 17/02/2014, dialucrii wrote

    @ Ellen

    You are absolutely right Ellen, none of the academics running central banks will have the stomach to take away QE before their currencies are trashed – they are all too afraid of deflation, despite it being the most natural thing in the world to happen after the credit excesses we have seen worldwide. They have the choice between deflation and a huge economic depression, or massive inflation after more money printing when the velocity of money picks up and the collapse in currencies that will follow as a result. Give a government the choice between raising interest rates now and causing a depression on their watch, or printing money now and causing inflation and currency collapse later on hopefully someone else’s watch, they are going to go for option B.

  12. 17/02/2014, Grahame wrote

    The pound is up against the Norwegian Krona, and you can play it via an ETF. The norwegians are not a debtor nation and they have oil. Start thinking about offloading some sterling. The mixed precious metals ETF (Gold, Silver, Platinum & Paladium) is also worth considering – I have some. Silver, Plat & Palad are used in industry worldwide. Why not diversify out of sterling a little while its up – it makes sense.

  13. 19/02/2014, richard williams wrote

    Thanks to the contributors to this blog, I thought I was the only one who choked on his cornflakes when we saw that Simon Popple had correctly called the bottom. Another pundit also recommended by the otherwise good value Bengt Saelensminde is Tim Price… both of them have produced very rational and extremely long presentations on why the end of the world is nigh and why gold will be king… I blame myself for being taken in by these guys (however well meaning)… at least as well as being poorer I am now older and wiser as well.

  14. 19/02/2014, dialucrii wrote

    So, because Simon Popple’s timing was off (those who can consistently time markets are few and far between) his entire investing strategy must be wrong?

    Everyone is after a quick buck. Had you held on another 2/3 years I suspect you may have ended up older, wiser and richer.

    We are living in a world where most markets are manipulated. That makes it nigh on impossible to read the data produced by those markets and come to the correct conclusion, because the data is so polluted. The desperate steps taken or yet to be taken by governments are also incredibly difficult to predict. All you can do is strip back the nonsense, identify the general direction which things are going then prepare and be patient.

    If you invested in Popple’s share tips without the conviction to stay the distance required then I don’t see how he can be blamed.

  15. 19/02/2014, JonnyTCP wrote

    Ellen12 that is an excellent observation. I think in the developed world there is an established trend, whereby political parties compete with each other to promise entitlements to voters. When they get elected they then have to borrow to meet these commitments. I wrote a song called Angry Young Man, where in the chorus it says “you borrowed from my feature so you could have it all now and then you sent me the bill”.

    I can’t comment on the tax and spend policies of other countries but in the UK one of the problems is that the majority of voters receive more by way of benefits and tax credits than they pay in direct taxes, so why wouldn’t they vote for a political party promising more spending? However the elite who could afford to redistribute some of their ill gotten gains (facilitated by central bank policies) have ways and means of avoiding picking up the tab. So we end up with situation where a shrinking middle tier of taxpayers ends up paying. This is only up to a certain point of course, until the goose starts to hiss and so the shortfall is made up through more borrowing and more future liabilities for our children and grandchildren.

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