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Quantitative Easing, Inflation and Gold

Release Date: 
Friday, May 10, 2013

Gold and Silver Prices:

Gold prices were choppy this week in reaction to various economic news before ending lower on the New York Spot Market. Silver remained range bound, closing marginally lower. Gold closed at $1449.10, down $22.60. Silver closed at $23.97, down $0.26 for the week.

Quantitative Easing, Inflation and Gold

Quantitative easing, in its simplest form, is when a central bank prints money to purchase bonds or other long-term securities on the open market. These purchases are designed to push down long-term interest rates and increase liquidity. The theory underlying quantitative easing is that low long-term interest rates encourage investors to acquire riskier and higher yield assets such as stocks.

The central banks for the United States, the Eurozone (the “ECB”), Japan, China and the UK have adopted their own forms of quantitative easing. As the Wall Street Journal explained last year, these central banks “are hoping to use currency weakness to stimulate demand [for exports] and are effectively taking some more of that fixed pool of demand for themselves. In other words, beggar thy neighbor.” (“Undeclared Currency Wars,” WSJ, 9/19/12.)

This week saw more central banks rushing to devalue their currencies. Australia’s central bank, the Reserve Bank of Australia, cut interest rates to a record low in an effort to devalue the Aussie dollar and stimulate the economy. CMC Markets sales trader Ben Taylor questioned the benefit of such a cut.” “As taxes rise and government spending slows, the RBA knows they will need to do the heavy lifting for a government running out of ideas,” he wrote shortly after the decision (“Australia cuts rates, sending Aussie dollar lower,” MarketWatch, 5/7/13.)

South Korea, Sri Lanka and Vietnam followed suit despite a warning from the International Monetary Fund (IMF) regarding inflation. “With inflation elevated and growth slowing, monetary policy is facing a challenging task,” cautioned the IMF. “’Further stimulus should be on hold until inflation pressures decline’ and rapid credit expansion in recent years justifies heightened vigilance.’” (“Sri Lanka Lowers Key Interest Rates to Spur Economic Growth,” Bloomberg, 5/9/13.)

The United States, which is firmly committed to quantitative easing, warned Japan not to violate international rules governing currency valuations as Japan struggled to reverse years of stagnant growth by doubling its money supply. At the same time, an IMF official echoed concerns about overheating economies. "There is a risk of overheating of domestic economies, so we have to pay close attention to this risk... There are some warning signals, but it is not up to the level to ring alarm bells….” Another IMF analyst said, “"If these are not controlled, there could be a serious boom and bust cycle…” (“G7: US warns Japan to stick to rules on currency,” The Telegraph, 5/10/13.)

Some analysts, however, were loudly ringing alarm bells this week. The most sobering alarm came from noted commodity trader Dan Norcini in an interview with King World News:

“The Western nations are sinking into an abyss of indebtedness.  How this massive build in government debt is going to be dealt with in the years ahead is something that few if any seem to be the least bit concerned about… nearly the entirety of the investing world is all sitting on the same side of the USS Titanic, the floating juggernaut of steel, which “God Almighty could not even sink”.  No one saw the iceberg then, and those few who see it now are quickly dismissed as frustrated market bears, rather than voices of reason and sanity. If we could truly print our way to permanent prosperity, without any pain, without any side effects, without any ramifications, then these central bankers will have become magicians, for they will have suspended the laws of economics and completely redefined the very concept of ‘money’ itself.” (“God Help Us All Because This Sure As Hell Will Not End Well, King World News, 5/8/13.)

As the G-7 nations meet to discuss the world economy, Germany’s finance minister echoed concerns about global liquidity and currency debasement.  "I'm very concerned… We have increasing problems in too-low interest [rates], and interest [rates] are no longer the mechanism for the right decision on allocating resources.” (“Germany's Finance Minister Warns of 'Critical Problems' From Stimulus,” WSJ, 5/9/13.)



Pointing to global quantitative easing, a fund manager for Threadneedle Investments, the international investment management arm of Ameriprise Financial, explained why it is important to own gold. “I continue to be bullish gold for the longer term…The recent break in prices does not change that view. The key factor that continues to support that view is the active role that central banks are taking to weaken their currencies by printing money.” (“Threadneedle Maintains Bullish Gold Outlook on Stimulus Programs,” Bloomberg, 5/6/13.)

Quantitative easing will ultimately lead to inflation warned a mining analyst with Casimir Capital. “According to some reports, there's been some $6 trillion in quantitative easing over the past few years. At some point, inflation is in a real way going to kick in. It's been kept at bay so far, but inflation has got to send gold higher. While mechanisms exist to fight that, it is hard to see inflation not happening at some point. The big question is when, not if. We're bullish on gold, but we've tempered our expectations to reflect the current market.” (“Gold, tweet retreats, self-fulfilling prophesies – Walker,” Mineweb, 5/6/13.)

Gold Mining Costs May Rise to $2000 Per Ounce

The cost of mining gold could rise to $2,000 per ounce within the next ten years, according to Earth Resource Group investment advisor, Georges Lequime. Mr. Lequime noted the mining industry has cut back on exploration and new projects. “We’re probably going to get a fall in global production quicker than what we had anticipated, and that should put some pressure on the gold price.” (“Gold company costs could hit $2,000 within 10 years,” Mineweb, 5/2/13.)

U.S. Mint To Limit Sales of America The Beautiful Silver Coins

Two weeks ago, the U.S. Mint announced it was temporarily suspending one-tenth ounce coins to allow inventories to replenish. This week, the mint stated it would limit sales of the popular 5 ounce silver America the Beautiful coins due to “soaring” demand. (“U.S. Mint to limit purchases of 'America the Beautiful' silver coins,” Reuters, 5/9/13.)

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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