Today, numerous stories are circulating regarding the Fed’s upcoming quantitative easing as many try to put a number on the size of the effort. Goldman Sachs puts the number at $2 trillion. Others put it as high as $4 trillion. In either case it is expressed in terms of the Fed "buying" treasuries. Let’s think about that for a minute. Who are they buying treasuries from?
I read a great article by Chris Ciovacco of Ciovacco Capital Management that explains the process. Essentially, the Fed goes to its primary dealers, who may be concerned about holding too many bonds, and trades them cash for bonds.
The dealers however, don’t want to hold currency for fear of it being debased, so they set out to buy other assets. Gold is likely high on the list of "other" assets because of its inverse relationship to the dollar. The more dollars printed the weaker it becomes and the higher the gold price goes.
Mr. Ciavacco acknowledges that gold is likely on the list of other assets to buy with new-found dollar liquidity. Now the Fed is not only creating dollars out of thin air, it may also be creating gold demand out of thin air. We’ve been saying it for months now, global gold demand is rising. Central banks are buying more and more and indeed will become net buyers of gold in 2010. That trend began in the latter half of 2009.
Brokerages are recommending gold as well, each publishing their own gold price predictions and recommendations from time to time. And now the Fed is practically forcing gold demand higher by printing even more money.
Do you see the irony? Now we are printing money to buy gold. The more we print the higher gold goes. The more gold we demand the shorter supply becomes and the higher the gold price goes again. It almost makes sense. Maybe we can buy our way out of debt.