Move on Gold Coming Soon? U.S.'s 'Willy-Nilly' Actions Could Be to Blame

Is it possible that gold could move up in value to say $1,400 and at the same time the relative values of the Dollar/Euro/Yen/ Sterling would remain stable (+/- 2%)?

One month ago I would have said that would not be possible. Today it looks like a wild card that could come into play.

There is a biblical amount of liquidity available globally at a cost less than 1/2%. In that environment gold is an increasingly attractive asset class. Gold doesn’t pay interest, but neither do T Bills. India just said so. We will see more of this.

Would a move up in the price of gold against the major currencies precipitate policy responses by Central Banks?

I think it would. As much as they hate to admit it, every Central Banker for the past forty years has watched the price of gold. It is their ultimate barometer. The US would be the last to respond and reverse the emergency liquidity measures. But it will be increasingly difficult to defend QE when other reserve currencies have reversed their cheap money policies.

The markets have called all of the policy responses for the last two years. We might not be done with that cycle yet.

Some thoughts from Mr. Bernanke from 2002 that I thought were relevant:

Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

Of course, the U.S. government is not going to print money and distribute it willy-nilly.

Note: These remarks were made in a speech titled Deflation: "Making Sure “It” Doesn’t Happen Here”. November 21, 2002. The full speech is here. The quote is from the fourth para. following the heading: Curing Deflation.

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Comments

[Mad Hedge F...:]

oie News broke this morning that, out of the blue, the Reserve Bank of India bought 200 metric tonnes of gold from the IMF for a handy $6.8 billion. The news set the gold market on fire, boosting the December futures $40 to an all time high of $1,088. It is the largest transaction in the barbaric relic since the Alaric’s Visigoths sacked Rome in 410 AD. It has been public knowledge for some time that the IMF was looking to unload 403 tonnes of the yellow metal in order to fund lending to poor countries. Many traders say this threatening overhang is why gold failed to definitively break out to the upside this year, despite six attempts. The expectation was that China would take this hoard as part of a broader diversification away from the dollar. Bringing India into the fray, which had no prior history of stockpiling gold, is a whole new plate of basmati rice. Not only does this raise the prospect of a bidding war with China for more gold reserves, other cash rich emerging market central banks are likely to join the mosh pit as well, no doubt panicked by the ominously rising whirr of printing presses in the developed countries. My short term goal for gold was $1,200, but I now have to raise that to the $1,300 favored by some chartists in view of the new dynamics. If you want to see my long term target, take a look at the chart below, which has gold zeroing in on its inflation adjusted all time high of $2,358. For those who prefer holding the barbaric relic of the physical kind, visit the tightest spreads in town on American Eagles and bullion at www.millenniummetals.net/ . And while you’re there, sign up for their free research product on precious metals.

Nov 04 06:17 AM

[Uppai Mappla:]

This could be gold's top. I am reminded of govt. of India's hectic plans to build up strategic oil reserves when oil was at $145 to counter the "coming" oil shock. Mercifully it was strangled in red tape.

Nov 04 04:35 PM

[willynill:]

Yes, it absolutely is willy nilly. My name is willynill and I know willy nillys.

Nov 04 08:12 PM

[swsprime:]

Bernanke's Willy-Nilly - Well now he's been caught with his pants down, and its' shocking!

Nov 05 12:04 AM