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QE3 And the Silver Entry Point

With QE2 scheduled to wind down this summer and millions of American voters still unemployed, it was clear that the Fed was itching to keep the monetary spigot open. But how would that be possible with oil, food, and precious metals at or near historic highs and the dollar at multi-year lows? Clearly, something would have to happen to justify QE3.

Now we know what. On April 27 the Fed confirms that QE2 will end pretty soon, and one week later a slew of bad economic numbers just happen to hit the headlines. First-time jobless claims, productivity, consumer confidence all suddenly appear to contradict the idea that a sustainable recovery is underway. Stocks tank, oil falls, and gold and silver retrace their post-Bernanke press conference parabolic spikes. The economy is suddenly looking double-dipish.

This might be pure coincidence, of course, but the timing is definitely propitious for a government that 1) knows it has to inflate away the dollar if it’s to have any hope of maintaining its global military empire and cradle-to-grave welfare system, and 2) has an election coming up in which a roaring 2012 economy is crucial.

Now get ready for the spread of the 1931 meme, in which the current false spring is compared to the one that preceded the descent into the Great Depression. Talking heads will demand action, government officials will claim to be watching the situation closely, and economists will start debating the form of the next stimulus plan. Then — with plenty of time for the folks in power to claim credit during the election campaign — Washington will announce something that puts QE2 to shame. Shock and awe on a Krugmanesque scale will hit the markets. And the plan to inflate away the dollar will really get going.

No real surprises here, but a dilemma for investors. How much trauma will the financial markets have to suffer before it’s a “crisis” capable of justifying QE3? What level on the Dow are we talking about? And where will gold, silver and oil have to go to wash away those pesky inflationary expectations? Put another way, where is the entry point for the next — inevitable — parabolic move up? Is it $30 silver or does the plan require $20?

It’s safe to say that the entire sound money world has spent the past six months wishing we’d mortgaged the house and bought Silver Eagles. Now, just maybe, we’re getting one last chance.

So, two questions:

1) Where’s the bottom? Obviously that’s unknowable, so the only reasonable approach is to ease in, hope it goes lower and then buy more. Eventually silver will stop falling and by then you’ll own a bunch of it.

2) Bullion or mining stocks? A while back Paper Empire published a chart that validates what owners of silver mining shares had been feeling: the miners had underperformed bullion to an absolutely historic degree. The obvious response was to short bullion and go long the stocks on the assumption that no matter what silver did, the stocks would have to outperform bullion.

It’s probably too late for that now, and with both bullion and stocks falling hard it’s not clear how the relationship is evolving. But it will be a good idea to track it, for instance by setting up a spreadsheet that updates daily, as an indicator of which kind of silver to bet the farm on.

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