Disaster the end with central bank QE policies - Levenstein
Hedge yourself against geopolitical tensions and expansionary monetary policies of central banks with gold, argues David Levenstein.
Posted: Tuesday , 08 Apr 2014
It has been slightly more than two weeks since the price of gold soared to over $1380 an ounce on due to tensions between the US, Europe and Russia over Crimea. As to be expected the event did not escalate into a major global war and so much of the safe haven buying has dissipated for now. But, the problems in the Ukraine, both financial and social are far from resolved.
On Monday, gold saw some new safe-haven as concerns that tensions in Ukraine may escalate after Ukraine sent additional police forces into its eastern regions to quell pro-Russian protesters who seized government buildings in Donetsk, Luhansk and Kharkiv this week.
The Ukrainian government sent security forces to Kharkiv to clear the country’s second-biggest city of separatists as Russia traded accusations with the U.S. and warned that its neighbour’s crackdown risks sparking civil war.
The pro-Russian protesters demanded a referendum on seceding from Ukraine, state-run Rossiya 24 television reported. The mayor of Kharkiv confirmed reports that several dozen other demonstrators seized the regional television transmission mast and demanded that more Russian channels be broadcast, according to Interfax.
The regional government building in Kharkiv was freed of separatists today, with 70 people detained, according to Avakov. The country’s National Guard and irregular forces of Pravyi Sektor, an umbrella organization that unites nationalist groups, were gathering in southern and eastern Ukraine, the Russian Foreign Ministry said.
Last week, gold traders were focused mainly of the latest non-farm payroll report from the US as well as the actions of the European Central Bank (ECB).
On Friday, gold prices rebounded after the release of the latest US non-farm payroll report, and after a string of lower prices seen in previous sessions.
According to the U.S. Labour Department, 192,000 new jobs were created in March after a gain of 197,000 in February. The unemployment rate was unchanged at 6.7%. Economists polled by Reuters had expected employment to increase 200,000 last month and the unemployment rate to dip to 6.6 percent.
In the last few sessions the price of the yellow metal found some solid support at around the $1280 an ounce level even as traders on Comex tried to push prices lower. In the wake of the report the price of spot gold rallied strongly and moved upwards by $15.50 an ounce to close out the week at $1302.30 an ounce.
Gold traders mulling the latest data released by the US Labour Department believe that the weaker-than-expected job numbers may force the Federal Open Market Committee to curtail tapering of quantitative easing.
On Monday, Federal Reserve chief Janet Yellen, in her first public address since becoming Fed chair two months ago, said that she was totally committed to the U.S. central bank's easy-money policies.
Since the 2008 financial collapse, the Fed has effectively printed more than $3 trillion. It has kept interest rates near zero for more than five years, and this month said it will keep them there for a considerable time even after it ends its bond-buying program, which is to be wound down later this year.
In her speech to some 1,100 people at a downtown convention centre, Yellen said the "recovery still feels like a recession to many Americans, and it also looks that way in some economic statistics."
She said "considerable" slack still exists in the job market and said further monetary stimulus could be effective.
"I think this extraordinary commitment is still needed and will be for some time, and I believe that view is widely shared by my fellow policymakers," Yellen said.
Meanwhile, even if the Fed continues tapering its bond-buying stimulus program, other central banks around the world are pumping out cheap money. Japan is going to continue with its unprecedented monetary stimulus programme and now that the European Central Bank is under new deflationary pressures, it is likely to continue its monetary stimulus.
Inflation in the Eurozone hit its lowest level since November 2009 in March raising expectations the European Central Bank will take radical action to stop the threat of deflation in the currency bloc. Inflation has been in the ECB's ‘danger zone” of below 1% for six consecutive months.
Prices have been falling at a pace of 6.5% in Greece, 5.6% in Italy, 4.7% in Portugal, 3% in Slovenia and nearly 2% in Holland since September, based on annualised estimates of Eurostat monthly data. The rise of the euro against the dollar, yen, Yuan and the currencies of Brazil, Turkey and developing Asia, account for some of this imported deflation.
Last week the European Central Bank (ECB) decided to keep the key interest rate at its record low of 0.25%, but Draghi signalled that it may be further lowered if inflation does not increase over the next months.
At a press conference last Thursday, (ECB) chief, Mario Draghi said that over the next months the central bank will consider various options of 'quantitative easing' to counter a very low inflation rate.
Quantitative easing, popularly known as money printing, is the purchase of financial assets from banks to increase the amount of money in circulation when there is a risk of deflation.
Draghi said there is still no risk of deflation, but stressed that the ECB was willing to act to counter low inflation, too, not just deflation.
He also refused to give details of how the quantitative easing would work, saying just that "the ECB will work on different options, to see which would be the most efficient".
Meanwhile, the Bank of Japan (BoJ) maintained record easing, as an April sales-tax hike threatens to trigger the deepest one-quarter contraction since the March 2011 earthquake.
The BOJ kept a pledge to expand the monetary base at a pace of 60 trillion to 70 trillion yen ($677 billion) per year.
“We will adjust policy without hesitation if achieving 2% inflation becomes problematic or if smooth progress isn’t made toward the goal,” Kuroda told reporters after the decision.
Kuroda said he saw no need to change policy now, saying a positive economic cycle is continuing and growth will exceed potential even though it will rise and fall due to the tax increase. Downside risks in the global economy have been falling since last year, he said.
Prime Minister Shinzo Abe is raising the sales levy to 8% in April from 5%, as he tries to rein in a debt load that the International Monetary Fund projects will be equal to 242% of the economy by the end of the year.
Governor Haruhiko Kuroda is predicted to face the biggest obstacle yet to his bid to generate 2% inflation as the first sales levy increase in 17 years squeezes households and businesses.
The economy is forecast to shrink 3.9% in the three months from April, according to a Bloomberg poll of economists, ending a projected six straight quarters of growth.
According to Bloomberg Japan’s biggest bullion retailer, Tanaka Kikinzoku has reported a fivefold increase in gold demand, in the first 27 days of March. Bloomberg reports, ‘sales for the quarter through March 27 were 249% higher than the same in three months in 2013.’ Not only has the impending tax rise spurred sales, but so has the decline in the gold price.
On Monday, the executive chairman of the Dubai Multi Commodities Centre, Ahmed bin Sulayem, speaking at the opening of the annua Dubai Precious Metals Conference, said that Dubai has become the biggest transit city for gold in the world last year with around 40% of the global physical gold trade passing through the city at 2,250 tons.
‘The Ruler of Dubai, Sheikh Mohammed bin Rashid Al Maktoum set us a target of 50 per cent when the DMCC started in 2002 and we are still a little short,’ he said. ‘Gold worth a total of $75 billion was moved through Dubai in 2013.’
As the central banks of the world in particular the US, Japan and Europe, continue with their expansionary monetary policies, the race to the bottom in fiat currencies is not yet over.
As the US Federal Reserve continues to prop up insolvent banks and buy US Treasuries, over time, they will not be able to end these ever-expanding programs. In Europe, the equivalent is the sovereign debt now found on the European Central Bank (ECB) balance sheet. And, if we include Japans ultra-aggressive policy of doubling the monetary base in just two years, I believe that this unprecedented monetary experiment will end in disaster.
I have long advocated that individuals should own physical bullion as a protection against the monetary recklessness of these bankers. This creation of money out of thin air and the application of more liquidity than the productive economy actually needs has caused the purchasing power of these fiat currencies to evaporate. Stay hedged with precious metals.
David Levenstein is a leading expert on investing in precious metals . Although he began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients.
His articles and commentaries on precious metals have been published in dozens of newspapers, publications and websites both locally as well as internationally. He has been a featured guest on numerous radio and TV shows, and is a regular guest on JSE Direct, a premier radio business channel in South Africa. The largest gold refinery in the world use his daily and weekly commentaries on gold.
David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali. For more information go to: www.lakeshoretrading.co.za