FEDERAL RESERVE FALLING SHORT ON ITS DUAL MANDATE : BUY PRECIOUS METALS / SEEKING ALPHA ( A MUST READ )

Federal Reserve Falling Short On Its Dual Mandate: Buy Precious Metals

by: Parsimony Investment Research

November 11, 2011

The Federal Reserve has a dual mandate set by Congress of maximum employment and stable prices. During Chairman Bernanke’s most recent press conference he indicated that the Federal Reserve has done a better job of maintaining price stability while falling short of fostering maximum employment. We believe this statement is quite important for monetary policy and for investors.

We believe the Bernanke and the Federal Reserve are more focused on reducing unemployment given the greater near-term social consequences of unemployment, particularly long-term unemployment as defined by U-6 and youth unemployment. The U-6 unemployment rate is 16.2 percent and the youth unemployment is 18.1 percent.

The chart below from the Bureau of Labor statistics shows that despite the easy monetary policy and the fiscal stimulus packages, there is an incremental 2 million people unemployed.

(Click charts to expand)

Between 2008 and 2011, the Federal Reserve has significantly expanded its balance sheet depicted by the monetary base (red line below) despite generating only a modest increase in real GDP (green line below).

We believe the Federal Reserve will continue to increase the monetary base and weaken the dollar as long term unemployment remains elevated. While the economy (measured by real GDP) and the unemployment rate have not benefited from a substantial increase in the monetary base, the price of gold and silver have benefited from money printing.

Tactical Strategy

The physical markets for both gold and silver should determine the long-term price of the metal and we believe individual investors should continue to accumulate physical precious metals to diversify their wealth and help mitigate the loss of purchasing power from central bank intervention. We own gold and silver in physical and ETF form, the SPDR Gold Trust ETF (GLD) and iShares Silver Trust (SLV). Investors interested in vehicles that retain physical metal should look into Sprott Asset Management’s Sprott Physical Gold Trust (PHYS) and Sprott Physical Silver Trust (PSLV).

Disclosure: I am long GLD, SLV.