Mario Draghi unveiled QE yesterday as the ECB looks certain to announce its much anticipated quantitative easing (QE) program. The move to print up to €1 trillion euro in the coming months appears to be a fait accompli although it will occur against a backdrop of strong German resistance and many concerns.
Following leaks that mainstream news sources regard as credible, the ECB announced monthly purchases of €60 billion in government bonds of member states. The ECB’s balance sheet currently stands at about €2 trillion.
Proponents argue that the move should or will prevent deflation and help revitalise the ailing euro zone economy.
It is hoped that QE will counter low euro zone inflation by increasing the amount of money available to financial institutions and to encourage lending by banks.
The aim of QE is to counter disinflation and act as a large stimulus to struggling economies. It should lower the cost of borrowing for European governments, which in theory should increase the availability of credit across the euro zone.
Although interest rates are already at record lows in the Eurozone and globally and yet economic growth remains weak.
It is also hoped that it will potentially boost equity markets. This has happened in the US and UK and more recently in Japan. However, the jury is still out if the “wealth effect” is actually aiding the struggling working and middle classes.
Many have voiced concerns about the ECB QE including Angela Merkel, Axel Weber and Andrew Sentance.
Weber, the former head of the Bundesbank cast doubt on the future viability of the euro yesterday. He said that if countries do not follow Germany in imposing structural reforms to boost their longer-term growth rates the euro would not survive.
He called the probable introduction of quantitative easing by the ECB as “only part of the fix.” Weber, now the chairman of UBS, said there were legitimate questions hanging over the viability of the single currency.
Andrew Sentance, formerly of the Bank of England’s monetary policy committee, and now senior economic adviser to Price Waterhouse Coopers, said the euro zone is not the environment where QE is going to be effective.
UK economist Roger Bootle of Capital Economics told the BBC “I am not the greatest fan of quantitative easing – I don’t think it’s going to cure the European malaise. The point is, there is not much else in the locker.”
Angela Merkel continued to make Germany’s concerns known, indicating once again the lack of consensus among European policy makers.
Germany’s greatest concern from Merkel’s point of view is that Germany does not end up on the hook for losses of defaulting peripheral nations.
Germans believe they should not have to underwrite weaker EU economies debts, via the printing of money by the ECB, while having no executive power over how those failed economies are structured.
“It’s important for me, as a politician, that all signals have to be avoided that could be perceived as weakening the necessity for structural changes and closer economic-political cooperation in euro zone countries,” she said.
A prospective compromise which is being widely reported is that the National Central Banks (NCBs), rather than the ECB, would purchase bonds and be responsible for any default.
Such a measure would encourage member states to press ahead with reforms rather than papering over their problems with free money in the expectation that defaults suffered by the ECB would be sustained by the stronger countries.
The ECB, like any central bank, has limited policy tools. In the wake of the crisis of 2008 the ECB reduced interest rates to zero in a failed attempt stimulate borrowing among populations saturated in debt.
It then engaged in confidence tricks – (the famous “whatever it takes” statement) – in the hope that confidence would make structural difficulties within the EU go away.
The last tool in a central banks arsenal is money printing and so the moment of truth for Mario Draghi has arrived.
The ECB hopes to stoke inflation. The latest statistics suggest that the Eurozone is deflating at a rate of 0.2% – a long way from the desired target of 2% inflation. If deflation takes hold it could create a feedback loop that will devour the banks and other leveraged financial institutions.
The interests of the banks and the wider economy are not perfectly aligned. In the U.S., QE has not generated a sustainable, robust recovery because the banks hoarded the cash in an attempt the shore up their balance sheets. At any rate, much of the wider public and companies cannot afford to take on more debt.
As such the money did not trickle down to the real economy and inflation did not take hold. The lesson will soon be learned that wealth cannot be generated by printing money – nor can sustainable economic growth.
Despite two waves of QE from the U.S. and Japan, deflation is taking hold globally. Oil, copper and lumber prices are stagnating indicating very weak economic activity worldwide.
These are the most uncertain times in economic terms, possibly since before World War II. Gold has always performed well in such circumstances. Both as a hedge against stagflation, high and hyper-inflation and as we are seeing today and was seen in 2008 and in the Great Depression – against disinflation and deflation also.
It would be prudent to take heed of these warning signs and acquire an allocation to gold coins and bars in fully-allocated, segregated accounts in fully-audited vaults in the safest jurisdictions in the world.
Today’s AM fix was USD 1,287.00, EUR 1,107.96 and GBP 848.44 per ounce.
Yesterday’s AM fix was USD 1,298.00, EUR 1,121.67 and GBP 859.32 per ounce
Gold climbed $0.80 or 0.06% to $1,293.50 per ounce yesterday and silver rose $0.22 or 1.23% to $18.15 per ounce.
Gold bullion is marginally lower in all currencies today ahead of the expected €1 trillion ‘stimulus’ to be announced by the ECB at lunch time.
Gold may have already priced in the ECB QE announcement and we may see a “buy the rumour, sell the news” sell off of gold this afternoon. However, any sell off will likely be swift and reasonably shallow as the Greek elections on Sunday should support gold going into the weekend.
More importantly, while gold is vulnerable in the short term, it is the euro which is now vulnerable in the medium and long term.
ECB governors led by Mario Draghi will propose purchasing 50 billion euros ($58 billion) in assets each month through 2016, two central-bank officials told reporters just before their meeting in Frankfurt today.
Gold bullion edged down 0.5 percent to $1,286.73 an ounce early in London. Yesterday, the yellow metal broke through $1,300 per ounce briefly reaching a five-month high. Comex gold futures for February delivery fell 0.6 percent to $1,286.10 in New York.
Silver retreated 0.3 percent to $18.16 an ounce. Platinum gained 0.2 percent to $1,272.88 an ounce and palladium fell 0.4 percent to $764.75 an ounce.
Australia & New Zealand Banking Group Ltd said gold may rise to $1,420 by the end of 2016 driven by increasing physical demand. Standard Chartered Plc expects the metal will rally to $1,320 by the fourth quarter as the dollar weakens, according to a January 20 report.
Some analysts remain negative despite recent gains – Societe Generale SA wrote in a Jan. 14 report that prices will decline to $1,000 by December 31st.
Central banks are making swift changes on the heels of the IMF predictions of a slowing global economy.
Yesterday, the Bank of Canada surprised investors with an unexpected interest-rate cut. Crude oil is the nation’s largest export, and the Canadian dollar fell against all 31 of its major peers as the central bank reduced economic forecasts.
Gold has surged in all currencies so far in 2015, including in Canadian dollars due to growing concerns about the Canadian property market and resource fueled economy.
Gold remains very undervalued and we expect it to continue to make gains as fiat currencies continue to be devalued. The possibility of the very sharp abrupt spike in gold prices, akin to the Swiss franc, is a real one. Gold will likely experience sharp gains in the coming months due to the many risks facing markets.
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