The Epic List of Fed Interventions… And What They Mean For Gold

Since the Financial Crisis erupted in 2007, the US Federal Reserve has engaged in dozens of interventions/ bailouts to try and prop up the financial system. Now, we realize that everyone knows the Fed is “printing money.” However, when you look at the list of bailouts/ money pumps it’s absolutely staggering how much money the Fed has thrown around.

Here’s a recap of some of the larger Fed moves during the Crisis:

• Cutting interest rates from 5.25-0.25% (Sept ’07-today).
• The Bear Stearns deal/ taking on $30 billion in junk mortgages (Mar ’08).
• Opening various lending windows to investment banks (Mar ’08).
• Hank Paulson spends $400 billion on Fannie/ Freddie (Sept ’08).
• The Fed takes over insurance company AIG for $85 billion (Sept ’08).
• The Fed doles out $25 billion for the automakers (Sept ’08)
• The Fed kicks off the $700 billion TARP program (Oct ’08)
• The Fed buys commercial paper from non-financial firms (Oct ’08)
• The Fed offers $540 billion to backstop money market funds (Oct ’08)
• The Fed agrees to back up to $280 billion of Citigroup’s liabilities (Oct ’08).
• $40 billion more to AIG (Nov ’08)
• The Fed backstops $140 billion of Bank of America’s liabilities (Jan ’09)
• Obama’s $787 Billion Stimulus (Jan ’09)
• QE 1 buys $1.25 trillion in Treasuries and mortgage debt (March ’09)
• QE lite buys $200-300 billion of Treasuries and mortgage debt (Aug ’10)
• QE 2 buys $600 billion in Treasuries (Nov ’10)
• Operation Twist reshuffles $400 billion of the Fed’s portfolio (Oct ’11)
• QE 3 buys $40 billion of Mortgage Backed Securities monthly (Sept ‘12)
• QE 4 buys $45 billion worth of Treasuries monthly (Dec ’12)

The Fed is not the only one. Collectively, the world’s Central Banks have pumped over $10 trillion into the financial system since 2007. This money printing has resulted in a massive expansion of Central Bank balance sheets.

This money printing has unleashed inflation in the financial system. In the emerging markets, where consumers can spend as much as 50% of their income, this has resulted in food riots and even revolutions as we saw with the Arab Spring in 2011.

This situation is far from over. Higher food prices continue to be a source of civil unrest throughout the emerging market space. Recently Saudi Arabia banned the exporting of poultry to halt prices, which rose by as much as 40%:

Saudi Arabia has banned the export of chickens in an attempt to curb an online public campaign to boycott poultry consumption due to high prices.

The Saudi Ministry of Commerce and Industry decided Wednesday to halt the export of chicken until the domestic market is stabilized, Emirates 24/7 reported.

The decision followed a campaign launched by Saudis on Twitter to boycott buying and eating chicken in the country when prices for poultry rose 30-40 percent, the Financial Times reported.

http://www.upi.com/Top_News/World-News/2012/10/05/Saudi-bans-chicken-export-after-price-hike/UPI-46681349468924/#ixzz2JIyjOaEB

As the cost of living increases around the globe, wage protests and strikes have become commonplace, particularly in the emerging market space:

South Africa - A total of 26 people were arrested overnight in connection with farmworkers' protests for higher wages, Western Cape police said on Wednesday.

At least 180 people had been arrested in connection with the protests since Wednesday last week…

http://www.iol.co.za/business/business-news/more-arrests-in-farm-wage-protests-1.1453090#.UQbnCo7pRgM

Indonesia: Thousands of workers took to the city’s main thoroughfares on Wednesday to protest delays in the increased minimum wage and hikes in electricity rates.

The workers from industrial areas in Bekasi, Bogor, Depok, Jakarta and Karawang belonging to the Indonesian Metal Workers Federation (FSPMI), the All-Indonesia Workers Union (KSPSI) and the Indonesian Workers Assembly (MPBI), demanded that Governor Joko “Jokowi” Widodo instruct companies to immediately comply with the 44 percent raise of the provincial minimum wage to Rp 2.2 million (US$228) for 2013.

http://www.thejakartapost.com/news/2013/01/17/workers-protest-against-minimum-wage-delays.html

China-Sanitation workers' salaries will be increased by 10 percent this year in

Guangzhou, the capital of South China's Guangdong province, following

recent protests demanding higher pay…

"The salary of sanitation workers will be increased by 10 percent this year and the government will also boost other subsidies, for example, housing allowances," Huang said…

Guangzhou has an estimated 38,840 sanitation workers, who earn an average of about 1,300 yuan ($209) a month, almost equal to the city's minimum wage.

http://www.china.org.cn/china/2013-01/22/content_27756710.htm

Germany-Germany’s major public services trade union Verdi had called for a daylong strike on Friday at Hamburg Airport, impeding security operations and delaying flights as passengers struggled to get to their gates.

The union is calling for an hourly wage of 14.50 euros for its members, who currently earn 11.80 euros per hour.

Only one of 20 security checkpoints had opened, with approximately 95 percent of the passenger security-check staff walking off the job.

http://www.presstv.ir/detail/2013/01/20/284554/german-airport-workers-go-on-strike/

These wage protests and the political instability they create has dramatically changed the investment landscape. Because of this, it’s wide to have some exposure to Gold.

Since the Crash hit in 2008, the price of Gold has been very closely correlated to the Fed’s balance sheet expansion. Put another way, the more money the Fed printed, the higher the price of Gold went.Gold did become overextended relative to the Fed’s balance sheet in 2011 when it entered a bubble with Silver.  However, with the Fed now printing some $85 billion per month, the precious metal is now significantly undervalued relative to the Fed’s balance sheet.

Indeed, for Gold to even realign based on the Fed’s actions, it would need to be north of $1,900. That’s a full 30% higher than where it trades today (see below).

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Best Regards

Graham Summers