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Fed Taper Plans

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December 05, 2013 – Comments (10) | RELATED TICKERS: TBT , GLD , GDX

With $4 Trillion on the FED's Books and another $85B being added monthly (as much as 2/3 of all new Treasury issues are purchased by the Fed), Tapering, will have two indisputable consequences:

1)  Treasury Interest Rates will increase dramatically (bond investors will panic as their "Safe Haven" investments (which have been proven to be safe since Disco was popular!)).

2)  That money must go somewhere.  With Real Estate on fire again and Stocks at new all-time highs, I vote for Gold.

Specific Recommendations:  GLD, GDX (ETF that invests in Gold Companies), TBT (Leveraged Short Treasuries) and consider Long-term Puts on TLT.

I could be wrong - I don't get paid for this (other than what I make or lose from my own choices :o) 

  

 

10 Comments – Post Your Own

#1) On December 06, 2013 at 2:07 AM, jiltin (30.12) wrote:

When FED tapering MBS, gold purchase is worth. Even though USD will become strong at that time, due to reduction in money supply, economy may have impact which strengthens gold. 

However, until stocks reaches top, gold is not right strategy unless someone wants to balance portfolio. 

Until then, ROI from stocks are higher than gold, either gold bonds or physical gold. 

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#2) On December 06, 2013 at 11:22 AM, amassafortune (29.56) wrote:

Here is a bit of supporting info that gold won't go much lower.

China buying 70% of this Swiss refinery's volume.

Sources for gold to refine are perceived as tight.

Some sourced bars are from the 1960's indicating that either long-term institutional holders are selling, or sellers have been selling so much they are making shipments from deep in their vaults.

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#3) On December 06, 2013 at 7:35 PM, awallejr (79.68) wrote:

Skyrocketing interest rates are not happening just from a taper.  Fed is still keeping the Fed fund's rate to near zero.  And I would think they would want to see the data from January and February first.

Bonds won't crash either mainly because boomers will be buying more as they retire. I don't see any real inflation on the horizon either.

No real geo-political calamity happening, aside from maybe the activity in  the waters off China.

I don't see any real thesis for gold to rise dramatically any time soon.

I wouldn't really invest in any gold "paper" since that seems to be an oxymoron.  However I continue to buy the currency gold coins as prices continue to drop.  Since I have a lifetime horizon with gold the cheaper the more I can buy.

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#4) On December 08, 2013 at 11:11 AM, MoneyWorksforMe (< 20) wrote:

I think many have lost sight of the multi-pronged approach of QE. Many “get” the idea of keeping interest rates low, but what is commonly overlooked is the effect of this policy on China’s economy. The fed, in an attempt to re-balance trade between the U.S. and Chinese economy, implemented QE, knowing full well the inflation would show up in China (due to the currency peg) and hopefully force them to tighten (strengthen the yuan vs. the dollar). How many times have we heard from people (Schiff et al), that China is importing US inflation? This is an extremely important point and it is a symptom of QE due to China’s peg. In turn, the millions of jobs lost to China during the previous decade would begin coming back–or so they hoped, as the US regained some of the export advantage it had lost. This has worked to a degree. BUT the Chinese have become an enormous purchaser of gold. So much so that they advocate their citizens buy it. Why? Well gold was the counter to the fed’s QE policy. This has served two brilliant purposes: 1.) China could insulate themselves from the inflation that they were importing by maintaining the peg via holding gold. Gold buys the Chinese time to set up a plan for yuan revaluation. 2.) China will not have to relinquish much of the power they had gained back to the U.S., via trade imbalances. A gold backed yuan will ensure China takes the stage as the world’s new reserve currency. Even though trade will be re-balanced, China will maintain all the power and wealth.

China is moving to accelerate this plan. And the above–more specifically–the progress and acceleration of this plan was the main topic of China’s third plenum.

If my thoughts above weren’t enough to really grab your attention, I expect these articles will serve to substantiate my claims. 

China is allowing the yuan to appreciate, and it now holds 2nd place for most used currency for trade finance. The Chinese yuan has already surpassed the euro…

http://blogs.marketwatch.com/thetell/2013/12/03/chinese-yuan-is-2nd-most-used-currency-for-trade-finance-overtaking-euro/

http://online.wsj.com/article/BT-CO-20131119-702876.html?dsk=y

So what should we make of all this? I believe there are three very important implications/conclusions: 1.) As China revalues its currency, expect inflation to move up here in the states. It’s a gradual process, until the new yuan is unveiled. 2.) China is getting close to establishing the new world’s reserve currency backed (at least in part) by gold. This has been the plan for years, but it cannot be implemented overnight. It takes time–and China is getting very close. 3.) While I agree there is plausibility to the idea that China may be purposely suppressing the price of gold to accumulate more — I don’t believe this to be the case. I think the fed and the west began attacking gold because they were catching onto the fact that China could accept the inflation, (i.e. not re-balance/not re-balance fast enough), so long as they were protected by a rising gold price. So the fed and the west are now getting China to revalue their currency, as neither the yuan nor gold–in the short run, and since 2011–are protecting them from imported US inflation; however, the Chinese ultimately win, check-mate, when they unveil the new gold-backed/gold,commodity backed-yuan. The west’s answer to this is probably war, but China is doing its part to cover itself on that end by increasing its military and more importantly, strengthening ties in the middle east and Russia.

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#5) On December 09, 2013 at 1:50 AM, awallejr (79.68) wrote:

And yet China's trade surplus has been increasing and inflation concerns easing.  Please, war is not even in the cards.  China still derives it's income from selling to the "west."  It would be pretty stupid for one to kill all its customers.

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#6) On December 09, 2013 at 4:10 PM, MoneyWorksforMe (< 20) wrote:

They began revaluing their currency in late 2010. Perhaps that  explains why inflation is "easing"?

China's future consumers are 1.4 billion Chinese citizens, not the over-indebted west. Debt = future decrease in consumption. Chinese incomes and standard of living will continue to increase, and the west's will continue in the opposite direction.

The western economies have been hollowed out, and left with debt; you just haven't realized it yet.

War will be sought by the west as they will be reluctant to relinquish the power of holding relatively strong currencies.

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#7) On December 09, 2013 at 4:11 PM, MoneyWorksforMe (< 20) wrote:

They began revaluing their currency in late 2010. Perhaps that  explains why inflation is "easing"?

China's future consumers are 1.4 billion Chinese citizens, not the over-indebted west. Debt = future decrease in consumption. Chinese incomes and standard of living will continue to increase, and the west's will continue in the opposite direction.

The western economies have been hollowed out, and left with debt; you just haven't realized it yet.

War will be sought by the west as they will be reluctant to relinquish the power of holding relatively strong currencies.

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#8) On December 09, 2013 at 6:00 PM, awallejr (79.68) wrote:

Geitner kept pressing them to do so. And the average Chinese is working for peanuts, they have a long way to go.  Decades from now perhaps but they have a long way to go.  The Atomic bomb is an excellent deterent for world wars.

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#9) On December 12, 2013 at 1:22 AM, ozzie (99.95) wrote:

awallejr - I get the distinction between the Discount Rate and the rate for Treasuries.  I disagree that Baby Boomers will continue to by CD's and/or Treasuries (ultimately, the same thing from a demand perspective) when Treasuries start to crash.  Regarding the timing - they might hold off until January or February - but that is still "right around the corner".

"Bonds won't crash" - probably true of Corps and Munis but NOT of Treasuries - they will crash - or Supply and Demand is just a misguided theory :-)

I don't argue for Gold necessarily from Inflation or Geopolitical instability (though those are other catalysts), but simpy from increased demand.

Thanks for your comments all! 

 

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#10) On December 13, 2013 at 7:11 PM, awallejr (79.68) wrote:

I never said Boomer's would buy CDs and just Tbills.  I said bonds (which include corporate and munis).  And the reason why you start to allocate more to bonds as you get older is because income is more important than capital appreciation.  As long as their bonds are paying it won't matter what its market value is except to the retiree's heirs.

Many will eventually face the sad reality that they can't afford to retire.  Many will be forced to continue working at least part-time.

As for gold's increase from demand, that demand still needs a catalyst.  And I just don't see it yet.  People keep talking how the Fed is "printing " money and this eventually will lead to inflation.  Except people don't consider what effect QE will have on the money supply once stopped since the very nature of the negotiable instruments bought actually will pull out more cash from the economy than they put in, namely principal PLUS interest.

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