Tags: Agarwal | Fed | Gold | bonds

Monty Agarwal to Moneynews: Fed Policies Good for Gold, Bad for Bonds

By Forrest Jones and Kathleen Walter   |   Tuesday, 16 Oct 2012 07:42 AM

The Federal Reserve’s ultra-loose monetary policies will keep the U.S. economy flooded with liquidity for a while, which will be good for gold but in the long run, bad for bonds, said Monty Agarwal, managing partner and chief investment officer of MA Capital Management.

To spur recovery, the Fed recently announced plans to buy $40 billion in mortgage-backed securities held by banks every month until the economy and labor market improve, a monetary policy tool known as quantitative easing (QE).

The announcement marks the third time the Fed has rolled out QE measures to jolt the economy since the 2008 financial crisis, with the first round seeing the Fed snap up $1.7 trillion in mortgage securities and the second round seeing the Fed buy $600 billion in Treasury securities held by banks.

Editor's Note: Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop. 

QE aims to stimulate the economy by injecting the financial system full of liquidity in a way that pushes down interest rates to encourage investing and job demand.

Side effects include a weaker dollar and potentially mounting inflationary pressures, and on the flip side, rising stock and gold prices.

Expect that trend to continue, especially with gold, since other central banks around the world are stimulating their economies in a manner similar to that of the Fed, weakening global currencies worldwide.

“Gold has been the absolute darling of investors. It’s the only hard currency that all the other soft currencies are measured against,” Agarwal told Newsmax TV in an exclusive interview.

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“It think what is a very good indication of what has happened with the value of the dollar, the yen, the euro is people measure them against gold. Gold has gone up, gold is trading around $1,740 right now.”

Gold prices have corrected recently and are down from a record of over $1,920 an ounce hit in late 2011.

Don’t expect the correction to last, but do expect economies to putter along and central banks to keep policies loose — a recipe for rising gold prices.

“I think gold is going one way, because I actually have a very dire view on the state of the global economy going into next year and for a couple of more years,” Agarwal said.

“That means that there will be more stimulus measures taken by the Fed and by the [European Central Bank], and that all points to a bullish market for gold.”

Sooner or later, however, economies will gain steam and inflation rates will rise, especially in the wake of the sheer volume of liquidity the Fed has pumped into the U.S. financial system.

“We are already seeing asset-market inflation. I mean gold has gone up, stock markets are up and grain prices are up. So inflation is there that is affecting hard assets,” he said.

Editor's Note: Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop. 

Currently, incomes are stagnant and job creation remains weak, which have kept consumer prices in check.

The U.S. economy created a scant 114,000 new jobs in September, but when that number picks up to around 250,000 to 300,000 a month, inflation rates will rise and the Fed will move to keep consumer prices contained.

“Then you can expect earnings to start rising, and that will be bad for inflation. And then you will see the Fed come out and look to raise short-term interest rates, which have been stuck at zero for a very long time,” Agarwal added.

Yields on the 10-year U.S. Treasury bond have run below 2 percent this year, meaning investors are willing to park their money in the asset class that barely keeps pace with inflation due to the safety and liquidity of the instrument and a lack of viable options elsewhere.

When the Fed does raise interest rates, however, those stuck holding bonds can get burned, as investors will go elsewhere in search of yield.

“The 10-year, which is trading at 1.7 percent and the 30-year under 3 percent — those will rise 2 to 3 percentage points,” he said.

“A huge amount of investors who are sitting in the bond funds, they have to be very careful. They will get significantly hurt.”

Editor's Note: Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop. 

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