Central Banks in Full Assault on the World's Forests

Wednesday, March 12, 2008

In another probably vain effort to stabilize markets reeling from too much leverage six central banks have committed themselves to printing more or less unlimited money in the foreseeable future. The Federal Reserve's announcement to now also accept MBS from private investors as collateral with a volume of up to 200 billion Federal Reserve Notes (FRN's) dwarfs the liquidity measures of the ECB, the Bank of England, the Bank of Japan, the Swiss National Bank, the Swedish Rijksbank and the Bank of Canada. 
Their statements collectively said that they would provide basically as much freshly digitized money as commercial banks would require in order to try to iron out the mess they created in the first place with their lowered credit standards.
Markets are brimming with rumours that the Fed may again cut the Fed Funds rate before the regular meeting on March 18.


GRAPH: The gold-oil-ratio shows that gold is again fairly cheap in comparison to crude oil. Chart courtesy of stockcharts.com.

Bundesbank president Axel Weber said on German Bloomberg TV that inflation risks would not allow a rate cut, sending FRN's to a new low of 1.55 for one Euro. IMHO these liquidity actions are just another inflationary nail in the coffing that has always gobbled up all unbacked fiat currencies in history. Who will ever take the political responsibility for the coming inflationary death of the Euro and the Fed currency?
While gold and silver took another breather on Tuesday after the recent run-up, oil markets immediately identified the new Tsunami of monetary inflation correctly and propelled crude to the new record close of $108.75/bbl.
Gold corrected to $965 but again held the support, possibly already creating the launch pad for the next take off. Gold is again way too cheap.
This constellation looks like a good opportunity to switch from oil into gold as both instruments are now bought for their inflation-proof qualities.
Investors who act accordingly may be in for another strong upleg in gold.
As all other commodities are rallying it will be only a matter of time before gold pierces the $1,000 mark - and may zoom to more than $1150 by late April/May. Gold has held steady close to its record high of $992, never giving up more than 3% of its gains. Silver's moves may be even more brutal as there is definitely more demand than supply and a very tight market in general. A low gearing should see investors through the current correction without giving up the next surprise move on the upside. It will come like the amen in a prayer. Foolish central banks will guarantee it.


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