Richard Russell: Expect A Jolt In Commodity Prices In The Near Future (GLD, SLV, GDX, AGQ, IAU, UGL)
Dominique de Kevelioc de Bailleul: Following the surprise announcement on Wednesday that six central banks have lowered dollar swaps rate by 50 basis points in an effort to allow European banks to bypass a rising LIBOR rate, Dow Theory Letter author Richard Russell told King World News investors should expect a jolt in commodities prices in the future.
“The world’s major central banks launched a joint action to provide chief emergency U.S. dollar loans to banks in Europe and elsewhere,” Russell stated. “In a desperate effort to raise stocks, the central banks of the world coordinated by forcing more money into the world system.”
The announcement incited a stampede into equities and commodities, as traders fell over each other to buy more of their favorite inflation play, resulting in pre-holiday gifts of a 400+ points rally in the Dow, $30 rise in the gold price (NYSEARCA:GLD) and a nice spike of a dollar to the price of silver (NYSEARCA:SLV).
“This is exciting for now,” added Russell, “but it will result in inflation within 6 months to a year.” Get my next ALERT 100% FREE
Moreover, and more importantly, the bold action by the Fed and five other central banks to lower rates in the swaps market also sent yet another clear signal that the Fed-led cabal of central bankers are not about to allow the epic ongoing debt destruction to get ahead of money printing. It’s simply a matter of inflate, or die.
But it appears that a recent RBC Capital Markets report suggests that Russell may have to come back on King World News with an encore inflation warning. In the spirit of coordinated central bank easing, Wednesday’s Fed announcement now opens the door to an easing on the other side of the Atlantic.
“It is now cheaper for foreign banks to borrow dollars from their local banks than it is for U.S. banks to borrow dollars from the Fed, so we could see a 25 basis point cut in the discount window in the coming days to level the playing field,” stated RBC Capital Markets’ Michael Cloherty.
Other Fed watchers believe, that as the year winds down, the timing of a Cloherty Fed-easing event could coincide with a “quiet coup” at the Fed come the first of the year, according to zerohedge.com, who cites a SocGen report which notes that 3 of 4 Fed hawks presently voting at the FOMC meetings will rotate out on Jan. 1, 2012—just in time for the next FOMC Meeting of Jan. 24-25.
“With under 30 days left in 2011, the current roster of 4 rotating voting Fed governors is about to be swept out, only to be replaced with 4 new ones,” stated zerohedge. “ . . . the rotation will probably be the most dramatic in Fed history as 3 die hard Hawks (and 1 dove) are eliminated only to be replaced with a panel which is almost exclusively Dovish.”
SocGen concluded in its report, stating, “Buy gold ahead of QE3 as money creation has a strong impact on prices,”
Russell agrees with the SocGen thesis, but his advice to investors is dispensed with a long-term horizon in mind, irrespective of further Fed easing speculated for January. He’s looking at the endgame for the U.S. budget and the value of the dollar, as inflation reasserts itself on top of a landscape of Fed-engineered artificially low interest rates—a recipe for a coming convulsion by holders of U.S. Treasury debt, according to Russell.
“Along with rising inflation will be its cousin, higher interest rates,” he stated. “This will impact everything from commodity prices to the rising cost of financing the federal debt. Right now the federal debt is being rolled over at extremely low interest rates, but as rates climb, compounding will occur and the cost of rolling over the federal debt will become a critical problem.”
Putting some numbers behind Russell’s analysis, compiled from the Heritage Foundation and the U.S. Treasury, Russell’s point becomes much more clear.
Year Tax Rev.* Debt* Int.* Avg. % Int./Tax Rev. %
2000 2,025 05,674 362 6.4 17.8
2005 2,153 07,932 352 4.4 16.3
2008 2,523 10,024 451 4.5 17.8
2009 2,104 11,909 383 3.2 18.2
2010 2,160 13,561 414 3.1 19.2
2011 2,150 14,780 454 3.1 21.1
* billions (US$)
Fiscal 2012 is expected to end with a total debt level of $16.4 trillion, well over 100 percent of GDP and nearly triple the total federal debt of the year 2000. When interest rates eventually rise back to an average rate of interest of, say, 6 percent, the federal budget deficit will explode into a Greece-like scenario.
What if the day of reckoning for the U.S. Treasury market hit during fiscal 2012? Calculating the average interest paid (rate of 6 percent) on a projected total federal debt of $16.4 trillion for fiscal 2012, the percent of total interest payments to revenue would reach 45.8 percent!
2012 2,150 16,400 984 6.0 45.8
As interest rates rise, the death spiral in the dollar begins. Russell advises investors to just let the magic of compounding interest work its damage on the federal budget and “to sit tight” with gold (NYSEARCA:IAU) as the Fed must expand its balance sheet as it monetizes the new debt, kicking off the aforementioned death spiral.
“The first bubble to be crushed will be the ridiculous federal debt,” Russell concluded his comments to King World News on Monday. “The second crushed will be the U.S. dollar. The compounding federal debt will act as a steam roller, rolling everything in its path. The island of safety will be pure wealth, better known as gold.
“Patient subscribers will be rewarded for their patience. The great enemy will be the act of compounding pressing its weight of the U.S. debt. Just as compounding turned rising money supply into fortunes, compounding the rising interest rates will turn fortunes into shoestrings.”
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