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Why Monetizing Debt Leads To Higher Precious Metals Prices

The announcement that the Federal Reserve would be monetizing some $600 billion dollars of U.S. debt was met with joy by some and dismay by others.  On both sides of the equation, there were many who felt that the full ramifications of monetizing the debt had not been considered.  While the whys and hows dithered, precious metals markets looked at the whole situation, took a decisive vote, and headed for the moon.

What about monetizing the debt triggered such a sharp response from metals traders?  Gold jumped above $1,400, and silver made a strong run for $30, falling just short.  Though the prices have dropped back a bit, they are still trading at sharply elevated levels when compared to even a year ago.  These upward movements all come down to traders’ and individuals’ opinions about the realities of inflation, currency devaluation, and the concept of an emergency situation.

Inflation Leads To Higher Metals Prices

One of the leading outcomes of monetizing debt is inflation.  As governments pursue programs to monetize their own debt, they generate inflation as a means of easing their own debt burden.  The more severe the debt situation, the more monetization will occur, and the Federal Reserve’s $600 billion monetization move is a powerful statement about the current debt situation in the U.S.

All this inflation makes it so that dollars buy fewer real goods, like cars, washing machines, and groceries.  Thus, who wants to keep their money in dollars?  It is better to keep personal savings in the types of investments that hold their value or go up when inflation occurs, and the most accessible value-preserving investment of this type for most people is gold or silver.

Small wonder then that coin dealers and mint distribution agents are seeing their phones ring non-stop.  Millions of traders and individuals have looked at the future and decided they want to protect their personal buying power against deliberate erosion by the government.  With demand for precious metals far exceeding supply, prices have nowhere to go but up.

Currency Devaluations Lead To Higher Metals Prices

As the Federal Reserve continues to monetize the national debt, it has the net effect of devaluing the currency.  A shorter path to the same outcome would be to get on TV and announce a devaluation of the dollar, but the Federal Reserve has shown no interest in that.  However, as the discussions at the 2010 G20 Summit indicate, monetization greatly lowers the value of a currency in the world’s eyes.

What can you do when your own country’s money starts losing value?  The logical path is to seek out forms of wealth that are accepted in all countries.  Again, precious metals such as gold and silver are the leading choices.  Legal tender everywhere in the world and widely desired, precious metals transcend national currency devaluation moves to preserve wealth.

Americans aren’t the only ones contributing to higher precious metals in response to currency devaluations through debt monetization.  When the Greek debt crisis was at its peak in May of 2010, citizens of Greece made the same logical decision about the upcoming worthlessness of their currency and rushed to buy any gold they could, paying as much as $1,700 per ounce to protect themselves against their government’s maneuverings on the currency front.

“Emergencies” Lead To Higher Metals Prices

Of course, the Greek situation isn’t the only case where a perceived emergency situation led to higher metals prices.  History is littered with dozens, from the Tulip Bubble to the fall of the East India Trading Company.  Monetization in and of itself is considered to be an emergency move of last resort, triggering a natural response in concerned citizens who rush to try and get more precious metals.

Of course, rational thought shows that the currency emergency the government faces is not a new arrival nor is it a surprise to those who have been watching government behavior.  Thus, the overall consideration of the depth of the current emergency situation needs to be taken into account.  Traders are moving metals higher by 5 to 10 percent, not rocketing them up 20 or 50 percent in response to the government’s most recent moves.

Still, as long as the public considers there to be a crisis, people will be checking their hold cards.  If they don’t like what they see in the bank, they may reach out for more precious metals to ease their minds and make them feel safe.  This will push the price of precious metals higher for as long as the Fed continues to take emergency actions through monetization.

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