Concerns that QE2 Will Create Virulent Inflation or Stagflation

Gold

Gold prices are higher today as the dollar is again under pressure ahead of the US elections and the Federal Reserve’s decision regarding the scale of QE2. Oil prices above $83 a barrel is supporting gold and oil prices are up 9% in the last 30 days which will contribute to increasing inflation pressures.

Gold is currently trading at $1,357.30/oz, €971.72/oz, £849.96/oz.

US Dollar Index – 5 Years (Daily). Click on image to view full size.

Markets await the important decision of the US people in their elections and Ben Bernanke regarding QE2 and whether the Federal Reserve will create $500 billion or $1 trillion of new dollars to buy government bonds. US Republicans look set to make significant gains on voter anger over the stuttering economic recovery. 

The election outcome should not have any material impact on the precious metal markets as the size of the fiscal and economic challenges facing Democrats and Republicans is such that gold should be supported no matter who gains power. Should QE2 be less than expected then there could be an initial sell off in all markets (equity, commodity, bond and the gold and silver markets). A higher amount (close to $1 trillion) would likely see further gains in all these markets. Any sell off in the gold market is likely to be greeted by eager buyers who continue to buy on the dips.

Gold in USD and Gold in Euros – 5 Year (Daily – Rebased to 100). Click on image to view full size.

The long term ramifications of QE2 and of the possibility of QE3, QE4 et cetera is that the inflation genie is likely to be let out of the bottle and there is a real risk of further falls in the value of the dollar and other fiat currencies leading to high inflation and indeed stagflation. The Federal Reserve is attempting for the first time to create inflation and it will likely succeed – the danger is that once inflation gains control it is extremely difficult to contain. Only sharp interest rate rises, as seen in the 1970s, would succeed in containing inflation but they would be a recipe for disaster. Especially as debt levels remain very high and property and mortgage markets are still under pressure in much of the western world.

Gold in euros continues to trade just below the €1,000/oz level and appears to be consolidating above €940/oz prior to resuming its clear upward trend (see chart above). With sovereign debt risks in the eurozone rising again, this trend does not look like abating anytime soon. With the dollar, the euro and all fiat currencies being created with reckless abandon, they will likely continue to depreciate against hard assets and particularly against gold.

Silver

Silver is currently trading at $24.74/oz, €17.71/oz and £15.49/oz.

Platinum Group Metals

Platinum is trading at $1,709.60/oz, palladium is at $651/oz and rhodium is at $2,175/oz.

Mark OByrne

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