Why the US Federal Reserve Policies Should Make You Want to Buy Gold Bullion
The great recession of 2008 really took the world by storm. Global stock markets crashed overnight. Trillions of dollars in asset values wiped off overnight. It was a massive bloodbath. It all started with the crash of Lehman Brothers due to a bad credit default swap bet. Lehman brothers lost everything and have to liquidate overnight. Its bankruptcy sent shock waves to all four corners of the globe. As a result, the US stock market lost a huge chunk of its total asset value within a very short period of time. It got so bad that banks no longer trusted each other. There are so many banks with bad mortgage-backed securities that these toxic assets were threatening bank solvency. This credit crunch resulted in the rates bank charges each other to spike up. The US government stepped in boldly and decisively by bailing out banks through its TARP toxic asset recovery program. Thanks to such proactive actions by the US Federal government and the US Federal reserve, things have stabilized or had they? The sad truth is that the US economy still has wobbly legs. It hasn't fully recovered yet. In fact, it is a jobless recovery. Millions of Americans are still unemployed and the once that are employed, millions are underemployed. In other words, they don't make enough income to afford their lifestyles without having to work two jobs or more. This is the back drop to US Federal reserve policies that keep the monetary system afloat. Keep the following information in mind when considering buying gold bullion and precious metals in general as a hedge against the continuing soft American economy.
Right after the credit crunch crisis that hit Wall Street, the US government rolled out multi-billion dollar bailouts for the major banks. While on paper, the United States government actually made money on some of these bailouts, it set a major precedent. It essentially made clear that there is such a thing as "too big to fail" in the US economy. In other words, the US government will actively step in to save banks and financial institutions because if they failed like Lehman Brothers, it can crater the US economy. Well, at least that's what Federal Fiscal authorities are saying on the record. There is of course an opposing view that argues that the US government by taking out trillions of dollars in debt to bail out banks and private financial players are essentially building bubbles. We're talking about bailout bubbles. The huge volume of cheap federal money flooding the financial system may have unintended consequences. It appears that the apparent success of bank bailouts has embolden in the US federal reserve to continue the bailout of the US economy in general through its quantitative easing program.
Quantitative Easing: How It's Supposed to Work
By buying billions of US bonds every single month, the US government is effectively sending a signal to the financial markets that it will keep the price of borrowed money cheap. With borrowed money and reduced interest rates, this should spur economic growth in the American private sector. Sadly, this grand scheme hasn't really translated into a convincing turnaround of the US economy. There are still millions upon millions of Americans out of work. Millions of Americans still have to get two or three jobs just to have the same lifestyle they had prior to the financial crash of 2008. Quantitative easing is also creating some unintended consequences. Instead of all these money being circulated in the US economy to create jobs and fund investments, a lot of that money encourages the cheap borrowing of assets that are invested in emerging markets like the Philippines, India, Hong Kong and Shanghai. It is in these emerging markets that a lot of equities have appreciated in value. In fact, the Philippines stock exchange, for example, has more than doubled since the flood of cheap foreign hot money funds. This is the real reason for the appreciation of emerging markets like the Philippine. It is not the underlying strength of the Filipino economy or other normal indicators of economic growth. This unintended consequence does not benefit the United States. Should interest rates increase in the US, you can rest assured that the emerging markets will start to crash. When this crash happens, it will impact Wall Street. In a very real sense, the US Federal reserve has painted itself in a corner. It can't abruptly stop quantitative easing because it might unleash an emerging-market meltdown in places like Indonesia, Turkey and the Philippines, which can then have negative consequences for Wall Street. On the other hand, it cannot continue to pour billions into bond purchases without driving the US debt deeper into the red. It is caught in between the devil and the deep-blue sea.
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Global Bubble Markets
As a result, global bubble market has emerged. This bubble market isn't based on really any real economic development. Take the case of the Philippines, unemployment still remains high, real economic growth in terms of standards of living remain dismal, still the official economic indicators show record growth. But it's a jobless growth. Thanks in part to the equity's market, this level of unstable market activity can only lead to potential market crashes similar to the Asian financial crash of 1997. It is a credit driven appreciation of real-estate assets. The Philippines is just one example of the global bubble market created by quantitative easing by the US Federal Reserve. In such uncertain economic environment, it is crucial for investors to zero in on investments that can withstand dramatic market reversals. In short, Federal Reserve policies should make you want to buy gold bullion. Sure at the moment, as the equity's market continue to roar gold bullion and other precious metals may be taking it in the shorts. Considering historical patterns, you can rest assure that this is temporary. Once there is a market crash or a continued erosion in equity's market gold bullion and other old-school precious metals, investments will once again be safe haven for investors looking to avoid either asset erosion or inflation. Gold bullion is historically proven store of value. In fact, gold is one of the most precious metals in the world not just in recent years but since almost forever. If you are looking to protect yourself against potential backlash created by global bubble markets, you might want to invest in gold bullion. Study the discussion below closely to find out why.
Gold Bullion: As Old School as It Gets
Gold bullion and gold investments in general, as mentioned above, are historically recognized as stores of value. In fact, ever since the Lydian’s figured out a way to standardize gold coins, gold has been the premier store of value for much of the world. From all four corners of the world from India to China to Japan to the United States to Europe, people all agree that gold, gold bullion and other gold-related assets are valuable. Its price may rise and fall but in terms of its ability to store value that is undisputed. We're talking about hundreds if not thousands of years of historical reliance on gold as a store of value. This is why investing in gold bullion in times of economic uncertainty is a good idea. Of course, don't park all your money in any one type of asset. However, devoting significant chunk of your total portfolio in precious metals like gold bullion is always a good idea in terms of diversification.
Gold and precious metals are hard assets. Why? Hard assets are assets that you can cash out quickly that maintain their value. If the economy crashes tomorrow, gold's value will spike up. Most importantly, you can easily cash in gold. It's very liquid. That's why gold bullion is so attractive. Moreover, due to the rarity of gold and precious metals in general and their historical industrial uses, there will be always less supply than demand. When this happens, its price remains high. This is basic economics. It is for these reasons that gold bullion is both a hard asset and a traditional store of value. Moreover, gold bullion is a pure gold play. It is not like gold coins that derive some of its value from its status as a collector’s item. When you invest in gold bullion, you are investing purely in the price of gold as a precious metal.
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Quantitative Easing and Inflation Backlash and Gold
Currently, we are enjoying a really low inflation rate. It is anyone's guess how long that will persist. However, in the history of the world, we are living in a statistical bubble. Usually when governments pump out so much money into the general economy, the price of money becomes cheap and the price of goods goes up. In other words, inflation rears its ugly head. It's anyone's guess how quantitative easing can result or affect an inflation backlash. Regardless, investing in gold-related investments and gold bullion in particular can be a great hedge against any unexpected inflation spikes. Make no mistake about it, inflation is bad news. When inflation goes up, the overall value of your money goes down. Thankfully, precious metals like gold and gold bullion go up in value when inflation goes up. So regardless of how high inflation spikes up, you can rest assure in the fact that gold prices will keep up. When you park your hard-earned money in gold, the value of your hard-earned money will not drop as inflation surges.
Quantitative Easing and the Race to Global Currency Depreciation and Gold
As mentioned above, as quantitative easing and other reckless central banking policies flood the global market with cheap paper money, there is always a risk that currencies will lose their value. In such a setting, investing in gold and gold bullion makes a lot of sense because even if the US dollar drops in value overnight, the value of gold remains constant. Instead of investing in paper by stuffing paper dollars in your pockets, invest in gold bullion instead.
It is anyone's guess what the overall global economic impact of quantitative easing and US Federal Reserve policy would be. We have already seen that such policies and lose money policies have resulted in unintended consequence. Instead of boosting the overall US economy and creating jobs, much of this US Federal Reserve action has made borrowed money so cheap that fund managers and global speculators have created asset values, and equities market bubbles in emerging markets. As mentioned above, this has resulted in the US Federal Reserve painting itself in a corner. It is reluctant to cut back on quantitative easing because this might crash emerging markets. On the other hand, it doesn't want to continue pumping cheap money into the United States because this might stoke inflation. It only takes a significant economic jolt for the whole house of cards to fall down. In such an unstable and scary economic situation, it makes all the sense in the world to invest in hard assets like gold and gold bullion.