Significant in Shinzo Abe being elected Japan’s Prime Minister in December was his promise of a more liberalized monetary policy by the Bank of Japan in an effort to revive Japan’s stagnant economy. Last week, Haruhiko Kuroda, Abe’s appointee as the BoJ’s Governor, delivered in spades with a promise to double the yen in circulation in two years with a goal of two percent inflation for the Land of the Rising Sun. Only days after Kuroda’s announcement, IMF managing director Christine Lagarde praised it, saying it will help boost global growth.
Lagarde’s praise came at the Bo’ao business forum in southern China, where she said loose monetary policies and “unconventional measures” had helped global growth. There is really nothing unconventional about money creation by central banks. They have been doing it since their inception and — alarmingly — at an ever increasing rate. It seems that to central planners, there can never be too much fiat money.
The BoJ’s program will be on top of the Fed’s $85 billion a month money creation, which is a rate of $1.1 trillion a year. The Bank of England is continuing its QE program of £375 billion, and the European Central Bank stands by its promise “to do whatever is necessary” to save the European Union monetary system. All central banks are leaving interest rates at record low rates, hoping that money will be lent, which would further increase the money supply via fractional reserve banking.
In the face of all this, gold and silver have suffered significant price drops. Why?
Primarily because the bulk of the world’s money managers have been instilled in Keynesian and monetarist economy theories that hold that government deficit spending and central bank money creation can hold off depressions and cut short recessions. The fact that Keynesian and/or monetarist policies have not held off multiple recessions since the Great Depression does not deter the true believers. Just one more massive injection or government spending program, they must think, is all that is needed to right the ship. So, we go from one scheme to the next, and all schemes call for more money creation with absolutely no concern about the end result.
The sad history of fiat money is that politicians print it until it is worthless. This time, though, the whole world, not just one country, is on a printing spree, which means that money managers around the world seeking to preserve their assets move from one fiat currency to another. Often they sell a currency only to return to it a short time later.
Meanwhile, more and more investors are discovering that neither gold nor silver can be created via keyboard strokes (which replaced massive money printing). Admittedly, the metals are not being bought at a rate that to hold back the tide of selling by money managers who now think that owning dollars (treasuries) is right move. They are playing a fool’s game, for history is not on their side. When the rush to gold and silver comes, there is no way of knowing how high their prices will go.
Before this economic/financial crisis is over, Lagarde will be only one of many members of the establishment to have praised fiat money schemes that will have failed.
I agree with your analysis in general, but I’d really like to better understand the significance (or lack thereof) of large purchases and sales by the few largest investors and few central-banks vs. the smaller purchases and sales by the many-more individual investors of more modest means.
Many people of relatively-ordinary means (ranging from what we might call lower middle-class to upper middle-class), all over the world, invest in gold and silver coins, precious-metal backed ETFs, etc. Do these activities significantly drive the spot prices we are seeing? Or are they instead mostly just a noise-level effect, when compared to a handful of decisions made by a few central banks and billionaires?
Note this isn’t meant to be a question about price-manipulation, but simply about volume and market impact. It seems to me that individuals of ordinary means might not reason the same way as billionaires and central bank officials, so I’d like to know which groups actually matter more. What are your thoughts about that? Thanks!
Presently, the gold market is driven by central banks, big investors and hedge funds. Although average investors are buyers as well, there are not enough of them to move the market. While some big investors (think George Soros) flow with the prevailing wind, others (think John Paulson) are in for the long haul. Central banks think long term, but hedge funds are fickle and can change their positions overnight.
I believe gold (and silver) to be in the early part of the second leg of a classic three phase (leg) of a bull market. The first leg is over, and most investors missed it. Now, the there is recognition that gold has been in a bull run for twelve years, and daily new investors buy gold, but not a pace that can move the market. With the correction (downside move in a bull market) that gold has had, many investors will remain on the sidelines until the metals have topped their highs of 2011.
Before this market is over, Wall Street will come in with a plethora gold/silver stocks offerings. Then Main Street will come in, putting in a top. I suspect that is a long way off, maybe a decade.