While even the most cautious observers think it’s all but certain that the Fed tightens monetary policy at its December gathering, what’s an even greater certainty is that central banks in Japan and Europe are planning to move even further in the opposite direction.
It’s not as if the respective monetary authorities in Japan and Europe haven’t already tried to stoke inflation through stimulus efforts. The Bank of Japan has been pumping its economy flush with hundreds of trillions of new yen over the past several years. The bank has expanded the money supply more aggressively than any other nation on Earth since it attempted to dig itself out of a sharp downward correction in the late 1980s. Despite gobs and gobs of monetary easing and government stimulus in the interim, the Japanese economy is now entering its third straight “Lost Decade.”
The ECB, meanwhile, is already talking up expansion of its €1.1 trillion ($1.2 trillion) stimulus program, which is less than a year old.
Dovish Draghi Promises Stimulus
The president of the ECB, Mario Draghi, gave an impassioned speech about how the central bank “will do what we must” to spur higher inflation. For more than a year, eurozone inflation has held at a paltry 0.1%. The declaration by Draghi makes it clear that the ECB plans to implement more monetary stimulus (perhaps among other measures) at its next policy meeting on December 3rd. The rhetoric also harks back to Draghi’s speech at the beginning of the QE experiment in Europe where he promised to do “whatever it takes” to keep the EU economy intact.
How the ECB goes about these subsequent rounds of stimulus, a move which seems to be a foregone conclusion, will require creativity. There’s not a lot of wiggle room left: the bank’s benchmark deposit rate is already negative, and leading bonds on the continent currently have negative yields (like the 2-year German Bund).
For its part, the Bank of Japan decided earlier this week to hold off on adding to its own prodigious stimulus ambitions. Because it has already taken such drastic measures in the past, the BoJ has actually maintained a steady monetary policy since last autumn. Nonetheless, the central bank has stuck to its annual commitment of ¥80 trillion ($650 billion) in fresh bond purchases and (essentially) money-printing. Though it may wait a bit longer than the ECB, more QE in Japan is surely on the way.
Implications for Gold
Most reasonable observers see that all of this sloshing around of fiat money in the global financial system is going to have an impact eventually—and the outcome from such unconventional measures is unlikely to be good. This is where gold and precious metals factor into the equation.
It’s useful to think of gold as the Achilles heel of fiat currencies, particularly the hegemonic U.S. dollar. Central banks can fool around with the money supply and other mechanisms in order to achieve short-term economic goals (like goosing certain metrics calculated by the government itself), but they invariably do so at the expense of long-term stability. They cannot, on the other hand, work this voodoo economics on gold. No matter what its price in terms of dollars is, gold retains its intrinsic value. When gold falls slightly against the dollar (like this morning), it’s merely because the dollar gained against the euro. As a result, the price of gold in terms of euros rose. That really tells us more about the exchange rate of the currencies, but not much about gold.
In fact, it’s also instructive to think of gold not in terms of “price” (because this varies from currency to currency, and each currency fluctuates relative to one another) but value other things priced in terms of gold. This flows from the adage that the same amount of pure gold, by weight, that could buy a suit or a loaf of bread in the past still holds the same purchasing power today. Meanwhile, every fiat currency ever eventually sees 97% of its original purchasing power erode through inflation.
Just food for thought.
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