The markets are back in bull mode… for now.
Last week, the U.S. Federal Reserve – along with the central banks in Japan, the United Kingdom, Canada and Switzerland – intervened in the global markets.
And, once again, the printing press was their weapon of choice.
It’s basically a collective admission that the crisis in Europe is serious enough to warrant any action that requires printing additional money.
[ad#Google Adsense 336×280-IA]This way, banks can borrow at lower rates in currencies like the U.S. dollar and reinvest it in currencies that are paying at higher rates.
They’ll make a profit, knowing that the U.S. dollar will be kept artificially low.
It’s financial shenanigans. But the upside is that it will likely boost risk assets (like the stock market) in the short term.
Over the long term… well, that’s a different story. Let’s take a look…
The EU Will Live or Die By the Euro
Simply put, the crisis in Europe won’t disappear until Europeans put forth a plan that addresses their mounting debt issues.
The real crux of the issue is that countries with solid debt ratings don’t want to support countries with junk ratings. Because it means their cost of borrowing will also increase.
That’s the problem that Europeans face. But not for Americans.
Why? Because the European Union is a monetary union. It has a single currency that NONE of the countries can print individually.
So, unlike in the past when Greece defaulted, the country can’t simply print Drachmas. Likewise, the Italians can’t print Liras. And the Spanish can’t print Pesetas.
Believe me, if they could print money, they would. Sure, it would lead to devaluation, but not default.
Unfortunately, that option doesn’t exist. With one currency, they’re each at the mercy of the Union.
The United States, by contrast, can print as many dollars as it wants. Hence, the risk of a United States default is more political than economic, like we saw recently.
The risk for the United States isn’t that it can’t pay its debts. It can pay its debts. But it chooses to do so with devalued dollars that it prints out of thin air.
That’s the present. But the future will be a little different…
Gold and Silver Are on the Move
Moving forward, people will realize that hard assets – like gold and silver – will be the beneficiaries of all this financial chicanery.
It’s rare to see a day when the U.S. markets rise at the same time as gold, silver and oil. When that happens, it’s simply the market telling us that it likes the monetary intervention. It likes the money printing, which acts as a de-facto liquidity injection for the global markets.
Gold and silver reveal the same thing – but with a different meaning altogether.
The metals are on the move because there will be more dollars in the market tomorrow than there were yesterday. And there won’t be a greater number of hard assets to back them up.
More than ever, the case for owning silver and gold is becoming evident. So far, during the financial crisis that began in 2007/2008, we haven’t seen any concrete solutions offering hope for the return of monetary sanity.
In fact, the “solutions” offered have been nothing short of reckless money printing. This influx of new money should lead to a never-before-seen rally in silver and gold.
Bottom line: In the short term, risk assets will likely move higher, just as they’ve done in the past when the market has received massive amounts of liquidity.
Ahead of the tape,
Karim Rahemtulla
P.S. In this month’s White Cap Report, we’re taking advantage of this liquidity push by buying a “cheap” risk asset. If the thesis I’ve laid out holds true, it could explode to the upside. Be on the lookout for this opportunity in Wednesday’s issue.
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Source: Wall Street Daily