A Shocking 2011 Cover-Up: How Much Treasuries is the Fed Buying?

If everyone would open their eyes to the reality of the market, I wouldn’t be in business.

The truth is investors rarely understand the makings and the behind the scenes activities that happen in the market every day. They rarely see the real price movements of stocks and often make bets on what the media tells them.

The problem is the media is always late. As such, investors reacting to the news are merely catching the wave and buying into the selling of bets the big boys made first.

It’s sad, but true.

That’s why I always encourage my readers to share their knowledge of what they read here, and from other reputable newsletter sources, with their friends and family. You’d be surprised at how many media outlets, analysts, and brokers get their ideas and market predictions from newsletters such as this.

Last week, I shared some insights on market manipulation in my letter, “Judgement Day is Coming.

Many of you emailed back asking how you can take advantage of it.

The answer is simple: Be Patient

While there is no easy way to tell how or when manipulation is going to happen, the market will eventually tell the tale.

Gold and Silver to Climb

I am confident that both gold and silver prices have been over manipulated in the last few months and expect that we’ll see it make some gains next week as market fundamentals come back into play. Seasonal trends also bode well for gold heading into May.

From a technical standpoint, gold prices should start to rally after holding key levels at $1,635 and $1,650. The next resistance would be near the 200-day moving average at $1,680.

More QE-related events continue to take place around the world. Just last week Bernanke hinted at more stimulus. When you think about the bigger picture, global central banks have pumped nearly $9 trillion in free money into the world – all the while they are buying up gold and hoarding it.

This manipulation in gold prices is essentially providing an artificially lower entry point to pick up more gold.

The strong money buying gold (aside from speculators), including central banks around the world, are not simply buying gold to flip it in the short term for higher prices. They are instead preparing for a period that follows the devaluation of fiat currency.

If you are looking to protect your wealth, the day to day movements of gold shouldn’t keep you up at night. Nothing has been solved with regard to the European debt crisis, and debt crises in Japan, the UK and the US continue to brew.

Wealth preservation is key.

While gold has taken a slight hit, the bigger picture remains. Gold is still ending the first quarter in 2012 with gains in all major currencies. It is 6.3% higher in US dollars, 3.2% higher in euros, 3.1% higher in pounds, 2.25% higher in Swiss francs and 12% higher in Japanese yen.

Overall Market

At the beginning of the year, I said the markets will surprise us with gains this year. Coming from an extremely volatile environment where Greece and Europe continued to scare investors and forcing negative pressure on stocks, that was a bold call.

Yet the markets climbed..

My call continues: I expect the S&P 500 to be trading above 1,500. While this would still be below its all-time high of 1,565 set in October 2007 (a key psychological number), it would be just enough to take the Dow to around 14,300, beating its high in October 2007 high by a couple of hundred points.

Keep in mind I am basing these numbers on a lot of technical and historical data. While I have no doubt that the US is recovering, I just don’t believe its recovering from a true fundamental growth standpoint – and not nearly as fast as the market tells us. Of course, the market is forward thinking historically by 6-12 months…

When you can borrow money for free and take all the time in the world to pay it back, it will be borrowed and money will be spent. This artificially stimulates growth as spending is made with credit. In other words, GDP growth is a result of borrowed money. And guess what? That borrowed money comes from the printing presses of the central banks.

Need me to elaborate?

In the past three months, the US Savings rate has plunged from 4.7% in December to a minimal 3.7% in February – that’s the lowest savings rate since December 2007’s 2.6% before the recession hit.

Why? In February personal spending soared by 0.8%, while incomes barely rose by 0.2%. How is this possible?

To make up for the amount of personal spending, US consumers are not only borrowing money to pay for everything, they are now ripping into their meager savings. But this won’t stop. As a result, debt will continue to pile up as interest accrues and spending continues. But what’s worse is that the Fed will continue to encourage it because it has no other choice. We all know what happens when you pay debt with more debt…

As this continues, the only way out is to print more money and continue to give it away for free. That means buying the US treasuries that no one wants. Despite the fact that no one wants them, the market for them remained strong in 2011 – even as debt soared into the multi trillions. Why?

The Fed Reveals a Shocking Fact

The conventional wisdom that everyone wants U.S. Treasury debt no longer exists. As a matter of fact, in this dangerous time of record U.S. sovereign debt issuance, it has only gotten worse.

If you think the Treasury market has been strong, you’re about to find out why.

The Federal Reserve Flow of Funds report for all of 2011 was just released. It reveals that in the last year the Fed purchased an astounding 61% of the total net Treasury issuance, up from negligible amounts prior to the 2008 financial crisis.

From Lawrence Goodman (President of the Center for Financial Stability and previously served at the U.S. Treasury), via WSJ:

It is true that the U.S. government has never been more dependent on financial markets to pay its bills. The net issuance of Treasury securities is now a whopping 8.6% of gross domestic product (GDP) on average per annum-more than double its pre-crisis historical peak. The net issuance of Treasury securities to cover budget deficits has typically been a mere 0.6% to 3.9% of GDP on average for each decade dating back to the 1950s.

But in recent years foreigners and the U.S. private sector have grown less willing to fund the U.S. government. As the nearby chart shows, foreign purchases of U.S. Treasury debt plunged to 1.9% of GDP in 2011 from nearly 6% of GDP in 2009. Similarly, the U.S. private sector-namely banks, mutual funds, corporations and individuals-have reduced their purchases of U.S. government debt to a scant 0.9% of GDP in 2011 from a peak of more than 6% in 2009.

The Fed is in effect subsidizing U.S. government spending and borrowing via expansion of its balance sheet and massive purchases of Treasury bonds. This keeps Treasury interest rates abnormally low, camouflaging the true size of the budget deficit. Similarly, the Fed is providing preferential credit to the U.S. government and covering a rapidly widening gap between Treasury’s need to borrow and a more limited willingness among market participants to supply Treasury with credit.

By the way, total US debt is now over US$15.6 trillion. World GDP in 2011 was US$78.94 trillion.

The US now owes nearly 20% of what every country in the world produces in one year in a dollar amount. They are the world’s reserve currency.

Now tell me how much gold is worth.

Until next week,

Ivan Lo

Equedia Weekly

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Disclosure: I am long gold and silver through ETF’s and bullion, as well as long both major and junior gold and silver companies.

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