“Dumping more U.S dollars into the economy generates economic growth…” While this theory was famous during the credit crisis of 2008, four years later it has become obvious that troubling issues at hand suggest otherwise.
What we all know: The devastating effects of the credit crisis dampened economic growth, and in order to get economic growth going again, the Federal Reserve introduced the idea of quantitative easing, or simply stated, creating more money. The idea was that more money in the system would result in losing bank lending, which would lead to economic growth. It didn’t work.
What we are expecting: In the past few months, there has been a lot of discussion about the Federal Reserve providing more “stimulus” to the economy in order to boost economic growth. In other words: a third round of quantitative easing (QE3); something everyone seems to be waiting for.
What we don’t know: The question shouldn’t be whether the Federal Reserve will print more U.S dollars, as that is just a matter of time. The real question on hand is: will it help in generating economic growth? The main goal of quantitative easing is to provide liquidity in the markets and increase lending, so that the economic growth gets on its way. Great idea, but that’s not happening.
The gap between bank customer deposits and banks loans is growing at the fastest pace in two years. It’s at a record amount—$1.77 trillion. This is the biggest gap between bank deposits and bank loans since July 2010. (Source: Bloomberg, August 19, 2012.) The current gap is more than 17 times the $100-billion average in the decade before the credit market froze. Bank deposits are on the rise, but lending is slow.
The banks are currently lending at pre-recession levels.
In 2011, U.S. banks bought $62.6 billion of U.S Treasuries and government debt. This year, banks have already bought $136.4 billion of U.S Treasuries and government bonds; double the total amount from previous year! Could banks be buying U.S. Treasuries with their customer deposits simply because they do not trust the economy?
Financial liquidity is not the issue at hand; lending is. The Federal Reserve is trying to generate economic growth, but in return the money is going back into buying U.S Treasuries.
In order for economic growth to happen, there has to be more lending.
The banks are hoarding the cash and keeping it in “safe” treasuries. It couldn’t be clearer to me that the banks do not trust the current U.S economy—they are being protective. What could be the reason?
It’s not rocket science; the unemployment rate is high (see: “Number of People Not Working Hits Second Highest Level Ever”), signs of economic growth are bleak, and world economies are slowing quickly. Why would banks take on the risk of lending? Why not play it safe until the economy returns to normal?
So first we had big American corporations hoarding almost $2.0 trillion in cash. Now we have the big banks hoarding cash, too.
I believe the attempt by the Federal Reserve to generate economic growth by printing more money is a failed idea. The job market, lending, and spending are not up to pace. As I have been saying all year, there is no growth in the U.S. Unfortunately, all the wrong pieces are now falling into place, with no quick fix ahead for the American economy.
Central banks are hungry for gold bullion and there is an overwhelming amount of evidence that suggests gold bullion prices are about to head higher. The demand for gold bullion from central banks has increased; China in particular has been making more news in this area.
Central banks’ appetite for gold bullion doubled in the second quarter of 2012. The central banks bought 157.5 metric tons of gold bullion in the second quarter. The reason for this recent spree of gold bullion buying was to diversify their foreign exchange reserves. (Source: Market Watch, August 17, 2012.) Central banks don’t seem to be relying only on the U.S dollar as much—and I wonder why.
Gold bullion accounts for 1.6% of China’s $3.2-trillion foreign exchange reserve, compared to the international average of about 10% of foreign exchange reserves in gold bullion. (Source: Financial Times, August 17, 2012.)
There is speculation that China’s central bank is planning to buy at least 5,000 to 6,000 metric tons of gold bullion over the next two years and it will start purchasing that gold bullion this year. Keep in mind that the average production of gold bullion mines is about 2,602 metric tons per year, according to World Gold Council.
A simple calculation would show that, if the central bank of China is planning to buy 5,000 to 6,000 tons of gold bullion and the total gold bullion production of the mines is 2,602 tons per year, this suggests that the Chinese central bank will be buying more than a two years’ supply of gold bullion produced.
China’s appetite for gold bullion is as strong as ever. In the first two quarters of 2012, China’s inflow of gold bullion from Hong Kong increased six times! In addition, the imports of gold bullion from Hong Kong were higher by 65% in April, compared to March. (Source: Mineweb, August 9, 2012.)
More evidence of China adding to its gold bullion reserve: China National Gold; a state-owned miner, is looking at buying Barrick Gold Corporation’s (NYSE/ABX) interest in a major African gold mine. This would be the biggest gold bullion deal that China National Gold has ever done. (Source: Reuters, August 17, 2012.)
The Chinese central bank will never say when it’s going to buy gold bullion and how much, but from the looks of it, it is certainly spreading its wings.
As I have been saying in Profit Confidential, gold bullion is not in a bubble. There is true demand for gold bullion and I believe it’s bound to go higher. Central banks around the world are hungry for gold bullion and have doubled their demand. The Chinese central bank has been making moves that are a clear indication of its rising appetite for gold bullion. And I’m not sure China’s demand for gold bullion is presently reflected in the price of gold bullion…but that might change very soon! (Also see: “Why the Bull Market in Gold Bullion Is Far From Over.”)
Where the Market Stands; Where it’s Headed:
The number of stock advisors turning bullish has been rising quickly and we figure it could be at the highest level since April. This is another negative for the stock market. It’s a contrarian indicator. The greater the number of bullish stock market advisors, the more likely the stock market will head down.
Be careful with that stock market rally, dear reader; it’s a fake.
What He Said:
“I see a deal when it’s a deal. And right now there’s a good ‘for sale’ sign flashing on gold bullion and gold producer shares. In fact, after peaking at the $690.00-an-ounce level earlier this year, gold could be a bargain at its current price of around $650.00 per ounce. As a reader, you are undoubtedly aware of my negative stance on the general stock market and the U.S. economy. As the economic problems that continue to brew in the U.S., as these problems develop into others, and as they are finally exposed, what investment other than gold will worldwide investors turn to?” Michael Lombardi in Profit Confidential, March 14, 2007. Gold bullion was trading at under $300.00 an ounce when Michael first started recommending gold-related investments. Many gold stocks recommended in Michael’s advisories gained in excess of 100%.