QE Will Continue, Gold Demand Continues To Surge

After its Halloween-eve meeting, the Fed told the market that the punch bowl will remain filled to the brim for some time to come.

However, it wasn’t completely pleasing to a market that has become conditioned to wishing for bad news, in hopes that the Fed’s largess will continue to flow.

In fact, the Fed policy statement noted that it “sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall.”

Balancing out this rosy view, however, the committee also cautioned that “the recovery in the housing sector slowed somewhat in recent months.”

So, a mix of optimism and pessimism. Investors, however, didn’t like the optimism, and stocks sold off. Gold, which had been trading nicely higher, fell disappointingly into the red, before recovering to close down just a couple of dollars.

The trading session was a microcosm of the past month or so — a lot of noise and even turmoil, but with everything ending up right about where it all started.

Sure, over the past few weeks we’ve had a government shut down, debt-ceiling brinksmanship threatening a U.S. Treasury debt default, more indications of a slowing U.S. economy and therefore continued QE, and sharp gold-price take-downs along with a couple of equally sharp gold-price spikes upward.

Yet, through it all, we find ourselves at the same place that I’ve been describing over the past few months in Gold Newsletter.

And that place is a U.S. economy and capital market that finds no sustenance or effect in quantitative easing, yet seemingly cannot go forward without it.

As I’ve said, the situation is perfectly analogous to that of a long-time drug addict. Having developed a tolerance to QE, the economy enjoys no added stimulus from further doses of the money-printing. But if the drug is withdrawn, the reaction is quick and violent.

So the Fed may talk about tapering QE, but they won’t tell us about the trick: That markets will dive when they begin to cut back on the money printing...and that interest rates will rise — thereby exploding the federal debt service burden and the deficit.

Add it all up, and it's apparent that the Fed cannot curtail its easy-money policies at any point in the near future.

In other words, the treats will continue.

Gold Demand Continues To Surge
Meanwhile the amazing surge of physical demand that was ignited by the orchestrated gold sell-off in April continues.

Far from a transient event that would merely pull future demand forward for a time, it seems that we are seeing a secular shift in gold’s supply and demand dynamic.

And with it, a long-term shift in global economic power.

At first, we saw the dramatic fall in gold prices spur demand in the historically price-sensitive Asian markets, especially China and India.

However, we soon saw India exit the stage, as the huge flows of gold into the country worsened an already-deteriorating trade balance, and the government reacted by clamping down on bullion imports with high tariffs and new rules.

Official imports fell to near-zero in July thanks to the Indian governments efforts. But as we see in every case where government tries to withhold something from its citizens, their actions served only to make the item even more desirable.

Gold smuggling obviously increased precipitously during this period, although to what degree no one can say.

What we do know is that, as the festival season has begun in India, premiums have reportedly risen to as high as $140 an ounce. They’re predicted to go even higher with the upcoming Diwali festival.

Domestic premiums of that degree will undoubtedly continue to draw massive amounts of “unofficial” gold imports into India.

Combine these reports of surging demand in Asia with the precipitous drop in COMEX registered gold stockpiles that are eligible for delivery and other anecdotal evidence, and we see that gold is flowing from West to East. And massively so.

This is a symptom (and a cause) of a concurrent shift in global economic power from the West to the East.

I won’t go into the many reasons for this. For our purposes it is enough to know that it is happening, and that this flood of gold will end at some point when the bottoms of the western vaults come into sight.

The ratio of futures volume on the COMEX to actual gold available for delivery can soar even higher than its current ratio around 55:1, for example. But at some point, some clever hedgie will realize that all he has to do is buy a big slug of GLD, then a bunch of COMEX calls...and then stand for delivery of gold that doesn’t exist.

The gold price would quickly catapult much higher in such an event.

The simple fact is that the futures market for gold does not come close to reflecting the current reality in the physical market, where supply and demand are greatly imbalanced. In the near term, it doesn’t matter, because the price is set in the futures markets.

But as long as those paper gold markets continue to set an unrealistically low price for the physical markets, those physical markets will continue to roar ahead with historically high demand.

By manipulating the game to such a degree, they are only hastening its end, and increasing their ultimate loss.

In short, the near-term for gold, silver and mining shares will continue to be volatile. But the long-term picture is still exceedingly bullish, and that will become increasingly obvious as time passes.