PIMCO is the world's largest bond fund and some of the smartest and most connected people in the world. Here's a recent quote by Mohamed El-Erian, PIMCO's #2 man. It's from a speech he gave at the Federal Reserve Bank of St. Louis and is titled: "
Evolution, Impact and Limitations of Unusual Central Bank Policy Activism
Here's the quote:
"To crystallize our conversation today, allow me to use a very – and I stress very – clumsy sentence to summarize the current state of affairs: In the last three plus years, central banks have had little choice but to do the unsustainable in order to sustain the unsustainable until others do the sustainable to restore sustainability! "
Basically, what he's saying is that the central banks have been following an unsustainable path for the last three years, that of printing money and diluting currency in order to keep the economies of the world from crashing. He's further saying that the central banks have no choice but to continue this doomed to fail / unsustainable path. This is because those who should be making the choices to guide the world economies onto a sustainable path, i.e. the politicians, haven't been doing so.
The politicians know that if they did the sustainable / prudent thing, then every nation in the world would be rebelling and rioting in the streets just like is going on in Greece. And the politicians would be thrown out on their rear ends or worse. This way, they get to play "extend and pretend" for as long as they can, before things blow up, and then they'll run for the hills. (In their private jets.)
But I'd argue that this has only been going on for 3 years. I'd rather say that the central bank money printing game to provide for unsustainable US government overspending has been going since the mid- to late 1980's, after the huge increase which then Fed Chairman Volcker used to break the back of some rampant inflation was wound down.
In January of 1990, the Fed funds rate was at 8.25% and it's been working it's way lower since then, spawning two massive bubbles (the internet stock bubble and the housing bubble) in the process. Here's a chart of Fed fund rate history since 1990.
It didn't really start getting low, rather, really LOW, until about 2001 for an extended period of time. At this point, currency devaluation really started setting in. But with all of the currency games which are going on around the world, how do you determine the real level of currency devaluation?
For me, gold is the most stable form of pure currency and this is why countries maintain and safeguard their gold reserves. Here's a chart of gold for the last ~20 years. In the chart you can see the effect of low Fed rates on the value of the US dollar against gold over time. Specifically, you can see how the rates being move down below 2% really started spiking the price of gold.
Fed money printing inspires low interest rates, especially in a world of Quantitative Easing (or direct US Treasury debt purchasing). Fed created low US debt rates allows the US government to increasingly spend further and further beyond its means. And this spending begets more spending, at first by choice, and later by need as interest payments balloon on this new debt and the current GDP level is only maintained by the fiction of increased government spending.
A mathematical function which defines an ever increasing and accelerating result is known as a parabolic curve.
As you can see from the chart showing the price of gold with its parabolic curve, the US economy is entering a phase where there is no turning back. If there isn't action taken very quickly by our politicians to return to sustainable government spending and taking the economic hit which the increased spending has attempted to hide, prices are going to ramp up ever more quickly.
The wall will eventually be hit where no matter how much the Fed prints, interest rates will be uncontainable. At this point, we'll be looking at a hyper-inflationary popping of the US dollar. The alternative is that the government cuts spending down to a sustainable level, by about 45%, and this instantly puts the US into the Great Depression 2.
My math says that, at the current trajectory, the US is guaranteed to hit this wall in less than 4 years. Furthermore, QE3 and QE4 and QE5 are foregone conclusions since they'll be required to continue the unsustainable amd accelerating government spending.
This means that commodities prices will continue to rise in the future, especially gold. There will be manufactured pullbacks along the way in order to try to reduce the magnitude of the gold and commodities impacts that are felt, but they're guaranteed to be much higher. Up until the US dollar collapses from over-printing.
While I don't know how that will roll out, I do know that I want to continue to be long gold for some time to come.