The markets deflated after Obama's job creation speech. This further confirmed that investors and citizens alike have lost nearly all faith in the President's ability to improve the economy. The economy and markets are now hanging by a thread as investors have been overcome with uncertainty and fear. We're sure you've been hearing all about the fear factor over the past couple weeks, but in this report we'll examine an aspect to the market no one is talking about - the increased money supply.

But first...

Rumours of Europe debt defaults are running rampant and the scary thing is, there is a lot of truth behind these rumours. Combine that with some of the worst US economic data in many months and we find ourselves out on the edge once again.

The harsh reality that the US is not snapping out of this recession is setting in. Our team had initially thought that the economy would bounce along until spring 2012, perhaps even gain some momentum, before the dream of paying off debt was smashed into oblivion by overspending and weak growth. The severity of US debt and what it could mean if the economy continues to falter appears to be setting in faster than we had anticipated.

It's hard for the world to play along (lend US money) when the US economy is falling from grace and can hardly muster-up a full percentage point of GDP growth. This has to be on the minds of the Fed and US government. If the US economy begins to contract, it could be lights out in regards to ever having a chance, however small it might be, at paying off its debt. For the short-term, our only hope at the moment appears to be more manipulation from the Fed. As we all know from the past 3 years, that can be all it takes to set off a market rally (and a huge one at that).

The Fed Policy Meeting, which is on September 20 and 21, should be very interesting and will likely dictate the direction of the market for the remainder of 2011. If the hawks persuade Bernanke to do nothing and let the economy sort itself out, we could be in for a rough ride in the markets. If Bernanke does what he believes to be in the best interest of the US economy, and injects it with more easing, the markets will rally.

What you have to remember about the Federal Reserve and the current Administration is that they are 'all in'. They already have $2.3 trillion in the pot. If they don't win a few hands, they won't be able to play much longer. Imagine you're in a poker game and you've wagered your house, car and your two kids' future earnings - everything is on the line here.

In the Administration's and Fed's mind, and unfortunately in reality, there is nothing to go home to if they lose. If Bernanke's plan fails and his $2.3 trillion was all for nothing, how in the world will a crippled American economy ever repay its debt?

In regards to unemployment there is not much the Fed can do without accommodative policy from the Administration. This has been proven over the past 3 years.

Ben Bernanke has commented repeatedly that long-term unemployment is a big problem and very dangerous to the health of the long-term economy. Low interest rates do not create jobs on their own. However, low interest rates do entice entrepreneurs to take risk provided the Administration doesn't bog down businesses in regulation, which only increases expenses in different areas. Provided the Obama camp is on side with minimizing regulation, Bernanke can still have a dramatic impact on the economy, but he is going to have to pull something very special out of his toolbox on September the 20th and 21st.


Gold Still Our Most Favourable Investment

With interest rates being held at record lows and no end in sight, this is the perfect environment for gold to continue reaching new highs. The negative real interest rate environment that exists today is very similar to that of the early 1980s. Remember that negative real interest rates exist when the inflation rate is greater than the interest rate. If this trend continues, and we believe it will, gold will go far beyond its inflation adjusted high and clear $2500 within 9 to 12 months. It is in a perfect up-trend channel and will use devastating economic news as fuel to increase in value.


Our team believes gold is nowhere near the bubble stage as it's still ridiculously underinvested in when compared to other financial assets. Read our report from two weeks ago titled "" for more information.


The Money Supply

One of our most outspoken Pinnacle Professors is Frank Holmes, who recently discussed the importance of the money supply and how it might impact the market in the coming months. Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure.

U.S. Global Investors' assets under management stood at $2.6 billion as of June 30, 2011.

The company's funds have earned more than two dozen Lipper Fund Awards and certificates since 2000. The Global Resources Fund (PSPFX) was Lipper's top-performing global natural resources fund in 2010.

Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a leading publication for the global resources industry.

Early this week he published an article titled,


The Federal Reserve influences money supply growth, and as can be seen in the chart below, money supply often spikes during crisis or uncertainty, such as Y2K, 9/11, the collapse of Lehman Brothers and the ensuing financial crisis. The current environment of sluggish growth, government austerity and worries over the European banking sector has likely influenced the dramatic rise in money supply over the past 18 months. The Fed likely errs on the side of caution to stimulate growth as inflation is not currently a concern."



Holmes went on to say that "Generally speaking, if money is growing faster than nominal GDP, that excess money tends to find its way to other uses such as investment in stocks, commodities and other financial assets. The relationship between money supply and financial assets is nonlinear and changes over time, but when tallying up pros and cons for the current environment, the recent increase of more than 8 percent in money supply growth provides a tailwind for commodities and stocks."

Pinnacle Digest