The leadership of the US Federal Reserve and the European Central Bank recently made a watershed announcement that signals a major shift in monetary policy.
No longer is control of inflation the marching order for their monetary policy. Monetary policy is now tasked to increase inflation by inflationary, expansive monetary policy. That means that in the US, the activities of the Federal Reserve Open Market Committee will include instructing the New York Federal Reserve Bank's trading department to purchase government securities on their behalf from the commercial banking community.
When the commercial banks receive bank wires for those securities from the Federal Reserve, new money is created in the system equal to that transaction.This is governor Bernanke's "Electronic Money Printing Press" at work. The Federal Reserve is also saying that there is little possibility that the "Discount Rate" will rise in the future nor will "Bank Reserve Ratio Requirements" be increased as both of these negatively affect the creation of new money.
What this all means is that a clarion call has now registered within the international "establishment" investment community that says that the most powerful ally of the gold shorts -the major gold producers hedgers, the gold shorts, the gold carry trade and the gold derivative operators - no longer support the short side of gold.
The establishment was not part of the gold bull market from 1968 to early 1978 but then turned bullish. They only did this, however, because the central banks ceased selling gold and actually increased their positions.
When the Wall Street Journal published an article on my departure from gold in 1980 with the headline "Bull Takes Off His Horns," Bleighberg of Barron's (can you believe a Barron's editorial that was actually bullish on gold?) basically called me a pinhead for leaving.
I also had the unmitigated gall to label "Chairman Volker" a class act and confirmed publicly that when I saw him coming I got out of gold with my partner, Vincent.
Well, the watershed announcement of last week means to the "establishment" the absolute opposite of what made me leave gold in 1980. It is a world-wide central bank invitation to inflation. "Fighting deflation is what makes gold go up. Fighting inflation is what makes gold go down."
With this new monetary environment unfolding, it's a good time to ask "what is cheap in gold?" and where should investors be looking for opportunities. That is a simple question and I believe the answer is as follows:
Gold shares are cheaper than gold because the present valuation of these shares is based on gold at $295 to $300. Gold bullion is also heading to the $400 level again and should make it this time with normal reactions and consolidations of course.
However, selectivity and technical market considerations are always critical determinants. I believe the most attractive are:
1. Financial gold shares which are Net Smelter Royalty based.
2. Gold producers without hedges.
3. Junior gold exploration and development companies that successfully pass the criteria for judgment of management dedication that I have outlined to you.
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