With a hat tip to the person who posted a link to the Schiff video, this is an article I have just posted on my blog:
This is what happened to silver when QE2 was announced last August:
Over the last few months, as the end of QE2 this month approached, mining shares were selling off out of fear that a deflationary air pocket lay beyond June and would slam the miners much like in late 2008. The received wisdom has been that the Fed would need for the economy to tank over the summer in order to generate the political cover to announce QE3.
There is another possibility, however. And its realisation has started to viralise based on this tweet:
That is a tweet from Bill Gross of Pimco, the world's largest holder (of trillions of $) of bonds. Except he doesn't hold them anymore as he liquidated them all recently, presumably in anticipation that the policy of defaulting on debt by inflating it away would continue.
What Gross meant is made clearer by the inestimable Peter Schiff in a recent short Youtube video:
What Schiff is saying is that this time round they will not be explicit about the QE - they will not be stipulating a closed-ended figure (in the case of QE2, $600bn) finishing at a certain time (in the case of QE2, June 2011). Instead, Bernanke is going to dole out wording tantamount to an open-ended, unlimited blank cheque, of purchases to achieve the same ends as QE2.
There are two reasons why this is likely. Firstly, they will have learnt from QE2 that announcing explicit, finite treasury purchases is not rewarded by the market with docility and acceptance but by sharply re-pricing commodities higher. So QE3 has to be rolled out more obliquely. And secondly, they simply have no choice but to segue straight into QE3, because the budget and the economy is now entirely reliant upon it and would slump to unfathomable lows if it were withdrawn.
That's the background for people like Jim Sinclair and James Turk predicting that we are going to have a surprise explosion to the upside in gold and silver this summer. I have been following Sinclair for eight years, ever since his "$1650 gold by 2010" prediction back in 2003, and I have never heard him as agitated as in this interview:
The dynamic in precious metals in the last few months has been hedge funds being long gold and shorting the mining shares aggressively as a hedge. It has reached the stage now where the miners are heavily oversold. The trend change will occur at such time as the market recognises that inflation rather than deflation is on the horizon, at which point the first hedgies will begin to close out their shorts and lock in their profits before the miners start to rise.
We may just be on the precipice of that now. It may start gradually, as the market slowly wakens to the Gross-Schiff contention. But this is, fundamentally, the difference between 2008 and 2011: in 2008 everyone was caught on the hop by the deflationary shock, whereas the countering policies now are in place and the time for their implementation has been set and is known in advance.
The mainstream media may trumpet the end of QE in the coming days, but the market will not take long to recognise that nothing has ended; rather, that all endings to QE have been removed. That is a seriously radical turnabout, and it's why Sinclair says in the link above that you would have to be out of your mind if you are thinking of exiting precious metals.