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Taper Tale is Tall and Long For Gold

by David EngstromOctober 24, 2014

When the Fed first announced it would begin tapering its asset buying programs, my phone began to ring with the trillion dollar question.  What will that do to stocks?

I think very few people believed the markets or the economy could survive without the benefit of multi-trillion dollar stimulus.  Face it, we’re addicted to printed money.  We can debate all day whether the data show we are in recovery, or that inflation is in check, or that debt is under control but let’s start with one fact we can all agree on.  Market uncertainty is prevalent as ever.

For the year, stock indices have been all over the place.  They have been down for the year, up to record highs, back into negative territory and now somewhere in between.  The economy has also sent mixed signals with GDP growth reported in both negative and positive territory.  At best, the jury is still out on tapering and its effect on the markets and the economy.  Or is it?

Throughout 2014 total Fed asset purchases will come in around $415 billion.  That is assuming the program ends as scheduled this month.  But here’s a shocker.  While the Fed has been tapering in 2014, corporate America has engaged itself in massive stock buybacks.  To date, of those I could track with some accuracy, these buybacks have totaled $404 billion. 

If the jury is still out on the taper effect, where would the markets be without another $404 billion shot in the arm.  Apple gave up the biggest bite of its cash and led the way with $32.9 billion.  Through August of this year, “740 firms authorized repurchase programs, the most since 2008.”  And, what happened after 2008?  Only the biggest financial crisis the world has ever seen.  Some say we were just minutes away from financial Armageddon.

The picture is pretty clear to me.  Without stock buybacks, the markets would already be in serious trouble.  With Fed asset buying now coming to an end, how long can stock buybacks continue to prop up the markets?  Will we get a repeat of the post 2008 market crash?

Here’s another shocker.  Except for one day this year, gold has traded higher than its 2013 close.  Even today it has outperformed the Dow by 200 percent.  This at a time when gold sentiment has been at its lowest levels since I can remember.  It’s been said that gold demand is down but it is not.  Just recently, China let it slip that, since 2013, its citizens bought 2000 more tons of Gold than previously believed.  That’s equal to 3 out of every 4 ounces mined in a year.  James Rickards says China itself has secretly accumulated as much as 3000 tons since last reported in 2009.

With the taper tale coming to an end, when China finally admits it has been spinning a tall tale regarding its gold purchases, the situation truly becomes explosive.  The moral of the story?  Diversify!  With gold at or below its cost of production, I don’t see how being long a little gold can hurt you. 

As always, these are just my opinions but the facts speak for themselves. 

 

http://online.wsj.com/articles/companies-stock-buybacks-help-buoy-the-market-1410823441

http://www.rttnews.com/corpinfo/StockBuybacks.aspx?PageNum=1

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