Tags: Korelin | Moneynews | Cheap-Money | Gold

Korelin to Moneynews: Cheap Money Is Here to Stay, So Buy Gold

By Forrest Jones and John Bachman   |   Sunday, 25 Nov 2012 01:29 PM

Loose monetary policies are here to stay, while lasting fiscal reforms will be punted down the road, a combination that will make gold an attractive asset, said Al Korelin, a market analyst and chairman of AB Korelin and Associates.

The Federal Reserve has 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, or QE.

The announcement marks the third time the Fed under Chairman Ben Bernanke has rolled out quantitative easing measures to jolt the economy since the 2008 financial crisis, with a first round (QE1) seeing the Fed snap up $1.7 trillion in mortgage securities and a second round (QE2) seeing the Fed buy $600 billion in Treasury securities held by banks.

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Quantitative easing aims to stimulate the economy by injecting the financial system full of liquidity via asset purchases that push down interest rates to encourage investing and job demand.

Side effects include a weaker dollar and fears inflation rates will soar once the economy gains steam, a recipe for rising gold prices.

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With President Barack Obama facing another term in office, expect the Fed to keep its foot on the accelerator and keep pumping the economy full of liquidity until the labor market shows marked improvement.

"I see precious metals continuing to appreciate in value purely and simply for a number of reasons. The money supply is only one of them," Korelin told Newsmax TV in an exclusive interview.

A lack of political will to narrow deficits and pay down debts will keep the dollar weak as well, and a weaker dollar leads to rising gold prices.

"QE is something that we have to accept, because the only alternative to quantitative easing really is to rebuild the house, and I don't think politicians are willing to do that," Korelin said.

Most Americans aren't ready for belt-tightening fiscal reforms either.

"Everybody right now is more concerned with just simply getting by. Look at the food-stamp situation right now, it's absolutely huge. All of this, in my opinion, bodes really well for precious metals," Korelin said.

"When the going gets tough, people are going to want to have things in their possession that they can touch and feel. Gold definitely falls into that category, and it has been in that category for thousands of years."

Fiscal issues have taken center stage lately thanks to the fast-approaching fiscal cliff, a combination of tax hikes and deep government spending cuts due to take affect at the same time at the end of this year.

Congress must work to steer the country away from the fiscal cliff, though longer-term fiscal reforms are needed as well.

Many market watchers are expecting Congress and the White House to succeed in keeping the economy away from disaster, though the likely solution will include temporary and stop-gap measures such as extending deadlines.

That leaves the Fed as the only player in town when it comes to fueling recovery, as the business community will put off expanding and hiring and remain in standby mode since they don't know what they will be paying in taxes next year.

"I think that quantitative easing is going to have to continue. That to me is not a good thing, and that particular action makes me pessimistic about the overall economy," Korelin said.

"Striking a deal is a whole different package. Will the tax cuts, in effect, go away? Will the deficit continue to grow? It's really hard to say at this point."

Republicans and Democrats remain at odds over taxes, with Democrats calling for the Bush-era tax cuts to expire for the wealthy to drum up fresh revenue.

Republicans have said such a move would punish many small business owners, who would subsequently put off hiring, which the economy needs for both growth and to create new taxpayers.

Compromise would be well received, even if policymakers put off making tough decisions today and kick the can down the road.

"If a certain amount of compromise is reached, for a lack of better terms, then I think that instead of bouncing violently, then I think that the can will roll smoothly down the road," Korelin said.

Longer-term reforms, however, must look out for small businesses, the backbone of the U.S. economy.

"I think however, when you look at the job creation and when you realize that the vast majority of jobs in this country are created by small business, I think the tax structure has to be beneficial for small businesses so that they can grow and consequently so that they can hire more people."

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