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The Central BankersBiggest Bubble

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    Stoeferle: Illusion of Omnipotent Central Banker Biggest Bubble We've Ever Seen

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    Financial Sense recently spoke with Ronald Stoeferle, Managing Director at Incrementum AG in Austria, about the ninth edition of his global gold report, “In Gold We Trust.” Topics covered include inflation, monetary policy, the bubble in the government debt market and catalysts for the next move higher in gold. Importantly, Stoeferle believes the secular bull market in precious metals remains intact.
    Deflationary Pressures

    “Despite the fact that central banks all around the globe are printing money like crazy, we actually see enormous disinflationary, or deflationary, pressure,” Stoeferle observes. Evidence of these pressures can be found in the plunging prices of industrial metals and commodity currencies. Stoeferle differentiates between monetary inflation (an increase in the money supply), asset price inflation and commodity price inflation. While the money printing of central bankers has boosted asset prices in real estate and stock markets, the pricing pressures are not showing up in commodity prices yet.
    Stoeferle acknowledges the confusion experienced by gold investors when the Federal Reserve doubled down on its quantitative easing efforts in 2011 and gold began its long decline. He offers the diminishing marginal utility of QE as a possible reason for this disconnect, while also pointing out that gold has actually risen against currencies other than the U.S. dollar. Stoeferle says that continued strength in the dollar will add to deflationary pressures and he doesn’t believe the Fed will raise interest rates.
    The Government Debt Bubble

    Interest rates around the world are too low, in Stoeferle’s view. This has created a “lucky time window” for over-indebted governments, allowing them to rollover debt at ever lower costs. These governments are addicted to free money, but they won’t be able to get away with irresponsible fiscal policies forever. There will be consequences.
    “This illusion of the omnipotent central banker is one of the biggest bubbles that we’ve seen,” says Stoeferle. He sees huge differences between the Fed of the past and the current leadership under Janet Yellen. While Fed Chairman Paul Volcker worked to stamp out inflation in the 1970s, central bankers around the world are now pursuing inflationary outcomes.
    “Sooner or later, we will see rising inflation numbers and rising inflation expectations. Then the exit from the bond market will be very small. There is only one way this market can possibly move.” He explains that the bursting of the bond bubble could be put off with an infinite QE program, but a loss of confidence in the currency would surely follow.
    Jim posits that the Fed is well-aware of potential fallout from the bursting of the bond bubble and has already made contingency plans. As of evidence of this, he points to the new rules at money market funds allowing them to “break the buck,” as well as legislation that might restrict withdrawals from bonds funds or charge high fees to get out.
    Stoeferle calls these policies “concrete examples of financial repression” and adds that the move towards abolishing cash is another example. “Banning cash is the only effective tool to block all escape routes from the paper money system,” he explains. When questioned about the $700 trillion derivatives market, Steoferle calls it “a ticking time bomb” and says too-big-to-fail risk is even higher than 2008.
    The Case for Gold

    “Global debt levels are currently 40% higher than in 2007. Therefore the systemic desire for rising price inflation is increasing. Gold is a financial asset that doesn’t have any counter-party risk and from a pricing perspective, relative to the monetary base, the gold price is currently at an all-time low.”
    From a technical perspective, Stoeferle says that while the downtrend in gold has not been broken yet, the extreme pessimism may be suggesting a turn. Jim agrees, expecting a final “puke moment” in gold and sees contrarian signals that an end to the decline may be near.
    Stoeferle sees bargains in mining stocks and believes this is a good entry point even if gold hits $1000 before continuing its rise. Given that the 15 biggest gold miners have a combined market value of $55 billion compared to Apple’s cash reserve of $200 billion, Stoeferle calls the gold miners “the most contrarian trade in the market” and a “once-in-a-lifetime opportunity.”
    Stoeferle’s research shows that, contrary to popular belief, rising interest rates are not bad for gold prices. In fact, historically, some of the biggest rallies in gold occurred against the backdrop of rising rates. Based on this research, Stoeferle believes a token rate hike by the Fed could be a catalyst for higher gold prices.
 
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