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Gold Doesn't Fear a Fed Rate-Hike Pause (Goldbugs have new conspiracy theory = M3 + Iran)
TheStreet.com ^ | 3/16/2006 | Nick Godt

Posted on 03/16/2006 3:35:31 PM PST by Proud_USA_Republican

Gold closed higher on Thursday despite a CPI report and other data that convinced many inflation is not a problem and the Federal Reserve will stop raising interest rates sooner than later.

But gold, which serves as a hedge against inflation, still found cause to rally. First, the dollar took a hit after the CPI. The Fed's 20-month-long campaign to raise rates has provided key support to the greenback. Gold, which is priced in dollars, normally rises when the dollar drops, as it takes less money to buy the same amount of the precious metal.

Second, crude oil prices, which gold has been tracking recently, jumped $1.41, or 2.3%, to $63.58 per barrel after the U.S. launched its biggest air attack in Iraq in three years.

The result: Gold for April delivery gained $1 to $555.40 per ounce, marking its fourth straight session of upside for a total gain of $14.10.

(Excerpt) Read more at thestreet.com ...


TOPICS: Business/Economy; News/Current Events
KEYWORDS: bourse; cpi; goldbugs; iran; m3; tinfoilhat
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Bummer for the the gold bugs. They are losing on of their biggest "The sky is falling" weapons, the M3.

_________ The CPI, many gold bugs believe, is not to be trusted. A real gauge of inflation, they argue, is M3, which is the largest measure of the money supply. And guess what? That weekly measure, which used to rock the bond and stock markets in the 1970s, is about to be scrapped on March 23.

The explanation on the Fed's Web site reads: "M3 does not appear to convey any additional information about economic activity that is not already embodied in M2 and has not played a role in the monetary policy process for many years. Consequently, the Board judged that the costs of collecting the underlying data and publishing M3 outweigh the benefits."

If you ask gold bugs, however, the Fed is trying to hide something. M3 includes the smaller measures of the money supply such as M1 and M2 plus large time deposits, institutional money market accounts, and Eurodollar deposits of U.S. banks held at foreign branches and at all U.S. offices. While the first two measures are mostly held by the public, M3 is about putting "money into the system," writes David Chapman, director of the Millennium Bullion Fund.

The first leg of today's inflationary environment, he says, started when former Fed Chairman Alan Greenspan cut rates in the early 1990s to stave off a recessionary environment, Chapman says. The latest leg came after the Fed cut rates to historical lows after the bursting of the tech bubble and the 9/11 attacks. Since 1995, M1 has risen 18.8%, M2 is up 89.5%, and M3 has increased a stunning 130%, Chapman notes.

"The Fed has been running a well managed hyperinflationary environment," says John Strafford, a gold analyst and editor of The Strafford Newsletter. "They must inflate or die."

But why remove M3 now?

Iran was expected to launch an exchange next week to start trading it oil in euros instead of dollars. Given current geopolitical tensions, a possible huge rush out of dollars would occur, and that would have hit M3 the most. A sharp drop in M3 has typically been seen as presaging recession, and markets would have panicked, says Chapman.

1 posted on 03/16/2006 3:35:33 PM PST by Proud_USA_Republican
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To: Proud_USA_Republican

Gold is a long-term must buy. With the massive debt of the US government (and its citizenry), inflation will eventually have to be used as a way out.


2 posted on 03/16/2006 3:39:16 PM PST by Pittsburg Phil
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To: Proud_USA_Republican
Inflation is not entirely in the hads of the Fed.

We will have inflation when the political hacks in Washington decide that inflation will make their jobs easier.

And I do mean when.

3 posted on 03/16/2006 3:39:26 PM PST by BenLurkin (O beautiful for patriot dream - that sees beyond the years)
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To: Proud_USA_Republican
rally

perhaps. at the moment, it looks like more of a bounce.

4 posted on 03/16/2006 3:40:27 PM PST by the invisib1e hand (...a capitalist.)
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To: Proud_USA_Republican
Thanks for posting; and especially your analysis. Fed Chair Bernanke has make clear its time to move our exports. In order to do this, the dollar must drop.

And I can hardly believe the "quoted" in the article is suggesting that "hyperinflation" has been running throughout the past while. ROFLMAO. Were this so, we'd be seeing massive evidence of it, worldwide.. creeps and signposts. There's been ZERO. And you know the MSM like I know the MSM, they had nada to report on the markets; and so they focused on the nth dead soldier. Blah.

I'll tell ya what's hyperinflated: The liberal MSM.

5 posted on 03/16/2006 3:42:11 PM PST by Alia
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To: Proud_USA_Republican

They call $1 a rally. But wait! Why a rally at all for something that is only going up, up, up?


6 posted on 03/16/2006 3:45:17 PM PST by RightWhale (pas de lieu, Rhone que nous)
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To: Alia

Interesting you should bring up exports. I read this today.

The latest data from the Port of Long Beach, Calif., indicate that U.S. exports remain very strong. Outbound containers were up 21% vs. a year ago in February, to 109,963. Interestingly, inbound containers were up just 0.9% vs. a year ago, perhaps pointing to improvement in the U.S. trade picture in the coming months. While that would be welcome news, a slowdown in U.S. imports would signal a slowdown in consumer spending, so these data bear watching. More likely, however, the data reflect a slowdown in activity related to the Chinese New Year.

The size of containers reported by the POLB ranges from 20 feet to 50 feet long. The POLB is the second busiest port in the U.S. and one of the world's largest seaports. More than $100 billion worth of cargo moves through the port each year.


7 posted on 03/16/2006 3:56:47 PM PST by Proud_USA_Republican (We're going to take things away from you on behalf of the common good. - Hillary Clinton)
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To: Pittsburg Phil

wrong...the Fed cannot by law monitarize the debt


8 posted on 03/16/2006 3:57:59 PM PST by georgia2006
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To: georgia2006

wrong...the Fed cannot by law monitarize the debt

WHAT! Surely you jest.


9 posted on 03/16/2006 3:59:37 PM PST by Pittsburg Phil
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To: Pittsburg Phil
wrong...the Fed cannot by law monitarize the debt

The open market committee does this every day when they inject liqidity by buying bonds.

10 posted on 03/16/2006 4:03:11 PM PST by AndyJackson
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To: Pittsburg Phil

ahh.. i think you should re-read the law creating the Fed.

Secondly, has the Fed ever monitarized the debt??? NO!!


11 posted on 03/16/2006 4:06:35 PM PST by georgia2006
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To: Pittsburg Phil

The Fed is now prohibited from purchasing bonds and bills directly from the Treasury, a practice which "monetizes the debt". The Fed can still purchase Treasury paper but has to buy them in the secondary market.


12 posted on 03/16/2006 4:07:15 PM PST by Pelham ("Borders? We don' need no stinking borders!")
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To: AndyJackson

while OMOs are used to create more high powered money, the Fed cannot by law inflate away the debt. There is absolutely no relationship between deficits and inflation despite what you hear from crooked brokers selling gold


13 posted on 03/16/2006 4:09:38 PM PST by georgia2006
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To: Pelham
The Fed is now prohibited from purchasing bonds and bills directly from the Treasury, a practice which "monetizes the debt". The Fed can still purchase Treasury paper but has to buy them in the secondary market.

That rivals the Democrats' statement that "Jack Abrahamoff didn't give us money from the tribes, he told the tribes to give the money to us" for the textbook entry for "a distinction without a difference".

14 posted on 03/16/2006 4:26:59 PM PST by jiggyboy (Ten percent of poll respondents are either lying or insane)
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To: jiggyboy
That rivals the Democrats' statement that "Jack Abrahamoff didn't give us money from the tribes, he told the tribes to give the money to us" for the textbook entry for "a distinction without a difference".

You'll need to take your complaint to the Fed, that explanation was in a policy paper I read that came from them. I don't presume to be as knowledgeable as their economists. Perhaps your criticism is valid, I'm not in a position to say.

If I recall their reasoning, purchasing directly from the Treasury resulted in an artificially low interest rate. Waiting for the public to absorb the Treasury issue allowed the interest rate to reflect actual demand. Purchasing in the secondary market doesn't short circuit the interest rate mechanism.

15 posted on 03/16/2006 4:45:33 PM PST by Pelham ("Borders? We don' need no stinking borders!")
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To: georgia2006
wrong...the Fed cannot by law monitarize the debt

True, but only because Congress kept that power for itself. And yes they have done it before.

16 posted on 03/16/2006 4:50:49 PM PST by atomic_dog
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To: Pittsburg Phil
Gold is a long-term must buy. With the massive debt of the US government (and its citizenry), inflation will eventually have to be used as a way out.

Yep. You understand it.

17 posted on 03/16/2006 4:52:07 PM PST by Mulder (“The spirit of resistance is so valuable, that I wish it to be always kept alive" Thomas Jefferson)
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To: Proud_USA_Republican
Gold, which is priced in dollars, normally rises when the dollar drops, as it takes less money to buy the same amount of the precious metal.

Huh, what? Huh, what? If gold rises, then it takes MORE money to buy the metal, not less. Hey, writer!

18 posted on 03/16/2006 4:53:06 PM PST by Migraine (...diversity is great (until it happens to you)...)
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To: Proud_USA_Republican
Outbound containers were up 21% vs. a year ago in February, to 109,963.

Great. But did they have something in them other than air?

19 posted on 03/16/2006 5:06:53 PM PST by SnuffaBolshevik
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To: Proud_USA_Republican

I need to book mark this so I can read it again later.


20 posted on 03/16/2006 6:33:43 PM PST by Bear_Slayer (When liberty is outlawed only outlaws will have liberty)
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