Is the Fed Getting Ready to Print More Dollars?

Yesterday at precisely 12:20 EST, gold jumped $13 an ounce.

You can see the big spike in this chart.

Gold’s surge came as Federal Reserve chair Janet Yellen spoke at the Economic Club of New York. During her speech, she hinted that the Fed would hold interest rates near zero for longer than expected.

If you’ve been reading the Dispatch, you know the Fed has held its key interest rate near zero for seven years. This “easy money” policy has made it extremely cheap to borrow money.

Recently, the Fed has been talking about raising interest rates. But judging by Yellen’s comments, a rate hike is unlikely anytime soon.

• In fact, Yellen hinted at cutting rates even further...

Here’s Yellen:

Even if the federal funds rate were to return to near zero, the FOMC would still have considerable scope to provide additional accommodation. In particular, we could use the approaches that we and other central banks successfully employed in the wake of the financial crisis...

We’ll translate this bank-speak into English for you. Because interest rates are already near zero, the Fed doesn’t have much room to cut rates to stimulate the economy. So, instead of cutting rates, the Fed could restart its “quantitative easing” program.

As Dispatch readers know, quantitative easing, or QE, is just another name for money printing.

Through QE, the Fed has pumped $3.5 trillion into the financial system since the financial crisis.

• Yellen is also worried about low inflation...

You might find that hard to believe. After all, the Fed’s easy money policies have already greatly inflated stocks and bonds. The S&P 500 has more than tripled in value since May 2009.

It hit an all-time high last year. Bond prices have hit record highs, too.

But Yellen isn’t talking about this kind of inflation. She’s worried that prices for everyday goods and services aren’t rising fast enough.

You see, the Fed thinks inflation helps the economy grow. The current U.S. inflation rate is 1.0%. Yellen would like it to hit 2.0%. But she’s worried that won’t happen, as she explained yesterday.

The inflation outlook has also become somewhat more uncertain since the turn of the year, in part for reasons related to risks to the outlook for economic growth.

• Meanwhile, commodities are showing signs of inflation...

Yesterday, we explained how commodities have rallied this year. The price of lumber has climbed 20%. Gold is up 16%. Silver is up 11%.

This is a major shift for commodities, which had been in a brutal bear market since 2011. The Bloomberg Commodity Index, which tracks 22 different commodities, had fallen 55% over the past five years. It’s up 1.6% this year.

• Commodities are the “building blocks” of the global economy...

However, the global economy is barely growing. China, the world’s largest commodity consumer, is growing at its slowest pace since 1990. The U.S. economy is growing at its slowest pace since World War II. And Japan’s economy hasn’t grown at all in two decades.

When the economy grows slowly, developers build fewer homes, office buildings, roads, and bridges. They use less copper, aluminum, steel, and other commodities.

So, something else is giving commodities their current boost…

• The U.S. dollar is weakening...

The U.S. dollar index has fallen 3.7% this year. This index measures the dollar’s performance against major currencies like the euro and Japanese yen.

The U.S. dollar is the most important currency in the world. Most investors “think” in dollars.

 When you look up the price of coffee or soybeans or silver, the price is listed in dollars. When the dollar loses value, it takes more dollars to buy a bushel of soybeans or an ounce of gold.

That’s why a weak dollar is good for commodities.

• BlackRock and PIMCO expect inflation to pick up this year...

BlackRock is the world’s largest money manager. It oversees $4.6 trillion. On Monday, BlackRock’s global chief investment strategist warned that inflation could start climbing.

PIMCO is another giant money manager. It manages more than $1.4 trillion. PIMCO also thinks inflation could rise more than most investors expect over the next twelve months.

Both companies are urging investors to protect their wealth from inflation. PIMCO recommends owning Treasury Inflation-Protected Securities (TIPS), according to Bloomberg Business. TIPS are government bonds designed to protect you against inflation. BlackRock likes “inflation-linked bonds and gold.”

• Gold is your best defense against inflation...

Gold is real money. It’s preserved wealth for centuries through every sort of financial crisis.

It’s also the only financial asset that isn’t someone else’s liability. Its value doesn’t depend on someone else keeping a promise to you. It has intrinsic value that people around the world recognize.

Just as important, governments cannot create more gold out of thin air. Gold actually becomes more valuable when governments print more paper currency, as they are doing today.

As we mentioned earlier, QE pumps money into the financial system without creating anything real. The result is more dollars chasing the same number of goods and services. Over time, this erodes the dollar’s value.

• As hard money that can’t be debased, gold will be the big winner...

Casey Research founder Doug Casey thinks the price of gold could easily triple in the coming years. According to Doug, buying gold is a way to “go long on government stupidity.”

If you’d like to supercharge your gold gains, we recommend reading this. It describes a gold strategy that few investors put into action. But it can deliver huge returns of 10x, 20x, or even 30x. We know that sounds unbelievable, but it’s happened before.

In fact, Doug thinks a modest investment of $25,000 in this sector right now could turn into $500,000 over the next five years.

If you’re interested, we encourage you to act quickly. These opportunities don’t come around often. Once the window closes, it’s unlikely to open again for at least five years, if not longer.

Chart of the Day

U.S. stocks are in a downtrend...

Today’s chart shows the S&P 500’s performance since the beginning of 2014. As you can see, the index rallied until last July. Then, in late August, it plunged 11% over six days. It’s been in a downtrend ever since.

The S&P has had a big rally recently. But as you can see below, it is still making a series of “lower highs.” This is a classic sign of a bear market. E.B. Tucker, editor of The Casey Report, recently said this rally won’t mean much until the S&P 500 sets a new high. That hasn’t
happened in almost a year.

We suggest you continue to invest with caution. Hold cash. Own physical gold. And avoid expensive and risky stocks.

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