Undeniable truths about precious metals

From first to worst. Gold and silver were the best assets to own during the first decade of this century.

During this second decade... not so much. Precious metals bulls have endured 4 years of prices drifting lower punctuated by periodic smash-downs and the occasional false-breakout.

What really gets the goat of gold and silver investors is that, throughout this time, there have been very good fundamental reasons to own metals. Somehow those fundamentals never show up in the price. The price action in recent years is enough to make bulls question reality.

Given that bankers and high frequency traders have criminally rigged the metals markets, people should question the long-term viability of these low prices. Expecting the fraud and manipulation in markets to continue indefinitely while physical inventory continues to evaporate isn't much of an investment thesis. The reasons to own precious metals are more compelling than ever.

Dollar-destroying debt and deficits are set to continue growing exponentially

The Republicans who now control Congress quietly passed a budget that completely suspends their self-imposed borrowing limit. They didn't just raise it by a few hundred billion, they removed the cap entirely for two years. Many expected Republicans would oppose increases in deficit spending now that they are in charge. After all, there was so much wailing and gnashing of teeth in prior budget battles with Democrats.

However, Congress has raised the debt ceiling 74 times since 1962. When faced with the choice of limiting spending or hiking the limit, Congress has voted to abandon fiscal restraint 100% of the time. It's safe to say deficits and borrowing shall persist.

All of this adds up to bad news for the dollar. Why? Because the Fed enables unlimited government. It is the purchaser of last resort when it comes to government debt, and it is the champion of artificially low interest rates. Congress would have long ago been forced to tighten its belt without the Fed pumping new dollars into the system and reducing the borrowing costs of world's foremost debtor.

Metals are priced as if $2 trillion dollars had not been added to the money supply

The Fed began the second round of Quantitative Easing in November 2010 and spent most of the next two years buying $600 billion in U.S. debt. Central bankers' encore was the $1.4 trillion dollar Treasury and mortgage-backed security buying spree called QE3. Over the course of those two programs, the Fed created $2 trillion, but you would never know it by looking at metals prices today. The currency inflation failed to boost gold and silver spot prices, and the dollar is stronger than before – for the time being.

We now know those programs were designed and implemented as a stimulus for major banks, not the economy. The Fed paid generous prices for the banks' garbage – mortgage-backed securities they stuffed with fraudulent loans. They bought Treasuries, using the banks, unnecessarily, as intermediaries and gifting them huge fees.

Today, $1.7 trillion printed and paid to the banks during QE2 and QE3 sits on deposit with the Fed as excess reserves. To top it off, officials decided to pay the banks interest on those funds, and they are paying a rate much higher than banks are paying you for your deposits.

Wall Street got that cash and, for the moment, they are happy to be sitting on it and collecting the interest. Someday, perhaps when Fed officials decide to stop paying banks to hold those funds on reserve, the massive inflation in the money supply will manifest in higher prices.

Markets should be looking forward to the day when the $1.7 trillion floods out of the Fed and sweeps through the economy. Metals prices and the dollar should reflect this inflation in waiting. But they aren't.