Money printing damage to markets is done whatever Fed does next, Gold’s time still coming

(February 21, 2013 - by ArabianMoney)

Stocks tumbled by the most in three months yesterday after news that Federal Reserve members are divided over the effectiveness of money printing through QE. The markets reacted as though the inflation of stock prices would stop the moment the Fed turns down the money presses.

Actually that is true. But what is not correct is to assume that inflation will go away as quickly. That is the nasty unintended consequence of QE that is now baked in the cake and waiting to erupt. You cannot add trillions to the balance sheet of the Federal Reserve and increase the money supply this much without causing inflation.

Cash piles and inflation

There is a pesky time delay, however. New money can just sit doing nothing as cash. US companies have their highest cash balances in history. Once this money gets spent the inflation will emerge and then some. Warren Buffett just bought his can of beanz.

Ironically that is more likely to happen if the Fed pulls back on QE. For that would signal the OK to companies to spend their cash because they would assume this meant the economic downturn was over. Indeed, they ought to do so as quickly as possible to avoid paying inflated prices. Spot the inflationary spiral!

What can central banks do in these circumstances? Imposing controls on property sales is one response. We are seeing it in China and even the UAE is looking at raising loan-to-value ratios for mortgages. But this is no more than a finger in the dyke to stop the deluge. It only delays the inevitable inflation that always, always follows money printing.

Real assets

Precious metal, and for that matter real estate investors should take heart. The golden crosses in the gold and silver market only flag up a correction while shares sell-off. The new lows will be excellent entry points for the huge rebound that will not be long in coming.

Indeed, buying precious metals at the bottom of this equity correction should be the trade of the year. Our sister publication the ArabianMoney investment newsletter has some interesting ideas on how to play this trade for maximum gain.

If you own precious metals then it is best to sit this correction out. For the danger of then missing the sudden rally is more important catching the downtrend right.

The stock market correction was correctly flagged up by our favorite chartist on Monday so regular website readers should not be too surprised. But if he is right then this is far from over.