Why QE3 is so Bullish for Silver
Dec 21, 2012
Silver has been selling off relentlessly since the Federal Reserve expanded its third quantitative-easing campaign last week. As that decision was highly inflationary, silver’s subsequent weakness has really vexed traders. But its counter-intuitive selloff had nothing to do with fundamentals. As the Fed’s past QE campaigns demonstrated abundantly, QE3 will eventually prove to be very bullish for silver’s fortunes.
Quantitative easing is a pleasant-sounding euphemism for debt monetization. Historically this dangerous practice has been scorned because it ultimately unleashes serious inflation. Monetizing debt is exactly what it sounds like. A central bank chooses to buy bonds, and then conjures up the money to do so out of thin air. This new money is injected into the economy as the bond sellers spend it, igniting inflation.
The rapidly-expanding money supply grows much faster than the underlying economy. So relatively more money chases after relatively less goods and services, which bids up their prices. As more money is poured into the system, each unit has less purchasing power. Inflation is ultimately an oversupply of money, which quantitative easing greatly accelerates. Investors flock to precious metals in such times.