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Japan's Quantitative Easing and European Financial Crises

Release Date: 
Friday, April 12, 2013

Gold and Silver Prices:

Gold and silver prices tumbled this week on the New York Spot Market pressured by technical selling, a recommendation from Goldman Sachs to short gold and Fed minutes which raised questions on the future of quantitative easing. The largest drop occurred on Friday: “Heavy stop-loss orders were triggered when June gold dropped below what was strong technical support at last week’s low of $1,539.40…. There has been no major, fresh fundamental news development to spark this latest drop in gold prices Friday.” (“Gold Hammered to 15-Month Low on Heavy Technical Selling, Weak Long Liquidation,” Kitco News, 4/12/13.)

Gold ended the week at $1487.30, down $96.30. Silver closed at $25.95, down $1.50 for the week.

Japan’s Quantitative Easing May Lead to Global Inflation:

Rather than stimulating Japan’s economy, this massive injection of cash may lead to global inflation. “There are other risks as well. By flooding Japanese financial markets with cash, that cash will have to find someplace to go, and it won’t all find a home in Japan. That suggests that the BOJ may be stoking inflation elsewhere, as well as potential asset bubbles. Furthermore, the BOJ policy will weaken the value of the yen (as has already started to happen). This is a conscious policy to aid Japanese exporters. But it is also a beggar-thy-neighbor policy that could spark countermeasures from Japan’s trading partners. We forget in all of the mania about China that Japan, despite its two-decade decline, is still the world’s No.3 economy and what the BOJ does will have a sweeping impact around the world.” (“A Yen for Cash: How the Bank of Japan Could Threaten the Global Economy,” Time 4/8/13.)

Japan’s plan to double its money supply may spark higher gold prices “if policy makers succeed in their goal of ending 15 years of deflation and sparking a new round of inflation. Gold is usually seen as a hedge against inflation, holding its value while the worth of other assets is eroded by rising prices. ‘The smart money is on buying gold’ rather than selling, said Mark O'Byrne, research director at gold dealer GoldCore in Dublin. ‘Given the BOJ's determination, there's no doubt you're going to get 2% inflation, and there's a risk it might be much, much higher. For those who are prudent, diversifying into gold makes sense.’" (Japanese Rush to Sell Gold as Price in Yen Jumps,” WSJ, 4//13.)

New Reports Warn of Future European Crises; Structural Flaws in World Economies:

The European Commission warns the Italian, Spanish and Slovenia's economies are “worryingly imbalanced.”

“SPAIN is experiencing excessive macroeconomic imbalances. Although adjustment is taking place, the magnitude of the necessary correction requires continuous strong policy action. In particular, very high domestic and external debt levels continue to pose risks for growth and financial stability….

“ITALY is experiencing macroeconomic imbalances, which require monitoring and decisive policy action. In particular, export performance and the underlying loss of competitiveness as well as high public indebtedness in an environment of subdued growth deserve continued attention in a broad reform agenda in order to reduce the risk of adverse effects on the functioning of the Italian economy and of the Economic and Monetary Union, notably given the size of the Italian economy…

“SLOVENIA is experiencing excessive macroeconomic imbalances. Urgent policy action is needed to halt the rapid build-up of these imbalances and to manage their unwinding.” (“COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL AND TO THE EUROGROUP,” European Commission, 4/10/13.)

The World Trade Organization lowered its global trade growth forecast again, noting that “structural flaws” persist in the world’s economies. The WTO originally projected global trade would increase by 5.6%. It now projects the growth to be 3.3%. (“WTO Global Trade Growth Forecast for 2013 Lowered to 3.3 Percent,” Bloomberg, 4/10/13.)

Analyst Commentary:

Julian Jessop, the head of commodities research for Capital Economics, told clients that gold has “plenty of upside,” and affirmed his forecast of $2,000 per ounce. “Superficially at least, there has been a close relationship between the size of the US monetary base and the price of gold since 2008. Nonetheless, even if the Fed’s asset purchases are scaled back later this year, the US monetary base is still on course for around $3.5 trillion, which…at face value, would be consistent with a gold price of $2,000 per ounce. What’s more, other major central banks, including the Bank of Japan and the Bank of England, are set to ease further.” (“One Gold Bug Sticks to Bullish Views,” WSJ, 4/11/13.)

In an interview with The Street, CNBC anchor and market analyst Jim Cramer explained why investors should include physical gold in their portfolios. “Jim Cramer: Yeah. Gold has a place in everybody's portfolio. Now when you say that and then gold goes down to the $1500 range, people say 'Why did you tell me to be in that?' It's like 'Hello? I've been recommending this thing for eight years' and I am not going away because if you look at what the currencies are being...what countries are doing to the currency, you've got to be kidding me to think that you don't like gold and just because gold's come down that gold is in a bear market I keep hearing. Fine. Well buy the bear market for heaven's sake... I've been recommending the coins now because of the capital flight that I saw after Cyprus in Japan... We'd always liked the coins but the markup has always been daunting. Legal tender? I don't know but I do want own the coins and I think that's a great investment.” (“Cramer Picks Gold Coins Over ETFs,” The Street, 4/9/13.)

John Embry, Chief Investment Strategist for Sprott Asset Management, told Mineweb that current gold prices provide “the single best buying opportunity” for gold. “Everything basically that is going on is supportive of higher gold prices yet they haven’t happened. So my take right now is that gold is very inexpensive…when we look back at this period we will recognize this may have turned out to be the single best buying opportunity in the entire bull market which is now in its 13th year.”

Mr. Embry also explained why silver will rise with higher gold prices: “I just think that the gold:silver ratio which is currently north of 50 probably as the bull market re-asserts itself in both metals, will fall towards historical lows which is down around 10 to 15:1, so if you thought the gold price was going to double just to take a number, the silver price could go up two or threefold more than that.” (“Why I like both gold and silver – Embry,” Mineweb, 4/10/13.)

Goldline provides a wrap-up of the week's precious metals news along with important commentary on the American Advisor Week in Review audio program. Click here to listen.

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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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