What is the Nature

Was doing my reading over at “The Automatic Earth” and I ran across this little gem.  

“If we can agree that QE has distorted prices of all assets [...]”

I have been amazed that the Federal Reserve Bank has kept the mass of duct tape, baling wire, and bubble gum together for as long as they have.  I cannot remember ever really leaving the recession that began back in ’06.  It seems to me and. I would posit, most “non-rich” folk that the recession is still with us. 

Now, I have always been interested in the nature of money.  I really don’t care about it except for two very important reasons:

•  as an abstract idea which makes people do the craziest things and;
•  as a set of 0’s and 1’s in my bank which I can transfer to other folks who will then give me what I need and/or want.

QE made things appear to tick along when you look at things the way bankers look at things.  Which is by no means the way that the great majority of folks look at things.

  

QE does seem to allow the current system to limp along.  The government can spend more than it takes in in taxes.  The banks can pay themselves big bonuses.  Rich folks can buy spiffy new homes. 

But the actual idea of QE is appears to me to be nothing more than running a printing press for a small swath of the society and hoping that some of it gets down far enough to make some difference in the general population’s life.   You could make an argument that this effect has occurred, but the argument would be tenuous at best.

Back to the quote that started the whole train of thought.

“If we can agree that QE has distorted prices of all assets [...]”

Governments running printing presses most often have a pronounced effect on the price of precious metals.  In the past, in nearly every case, a government running printing presses makes the price of precious metals go up.   But that hasn’t happened here. 

My point here is simple.  The price of gold and silver are out of whack when compared to the money that is stealth printed by the Fed. 

From the Fed

The price of gold in mid-2011 was around $1,800.  The price of silver in mid-2011 was around $45.  In Mid-2011 the Fed’s books held around 2.5 Trillion.

 

From Kitco

The price of gold in now is around $1,250.  The price of silver now is around $19.  The Fed’s books seem to be pushing 4 Trillion pretty darn hard. 

So, if everything made sense, and if there were a dependency between federal debt (printing) and the price of precious metals, the price of gold and silver should be about 30-60% above their values in mid-2011 (gold in the $2,300 to $2,900 range: silver in the $60 to $72 range). 

Now, in the words of the weasels “past performance is not an indicator of future performance”.  But when long term historical trends don’t seem to hold true anymore, one has to look around for exceptional events.