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"When inflation arises, there will be a shift toward precious metals" - Wealth Management

March 14,2013

Fed QE exit will drive investment capital from stocks and into gold, says Douglas Ehrman at Motley Fool

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While the economy is in somewhat uncharted territory, you can begin to trace the likely results of the removal of the stimulus from this artificially created rally. There's a growing consensus among economists that while inflation has apparently been averted for the time being, it's firmly on the horizon. In his recent testimony before Congress, Chairman Ben Bernanke was quick to point to low inflation statistics, but he offered little in the way of an exit strategy, even when pushed.

When inflation arises, there will be a shift toward precious metals and other stores of wealth, including commodities in general. This shift will not only drive gold prices higher as a standalone event, but the sector rotation out of risk assets -- specifically stocks -- will also serve as an additional catalyst for gold. With the Fed -- in our hypothetical -- no longer blindly supporting stocks, an accelerating shift will occur into safe-haven assets. This will serve as a further catalyst to drive gold prices rapidly higher.

Please note that this isn't meant as a fear-mongering gold play; the timing of such a shift is very difficult to predict, and the Fed may be able to find a way to unwind the overleveraged balance sheet with a modicum of order. But the risks to the market are there, and the safety that gold offers shouldn't be overlooked. It's not unlikely that a significant part of this move may occur without a lot of fanfare. Maintaining an allocation to gold, particularly given the recent declines, is a prudent way to maintain some balance in your portfolio.

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