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.
Author's Disclosure: None
