A new wave of money printing in the U.S. and Japan, weak job market and the gold price breaking psychological price barriers spur gold's new steep rise
Many people have asked me why gold has gone up so much in such a short amount of time. The gold price increased from $1,245 per ounce in early September to $1,345 in early October. That is an 8% increase in less then a month. In the brief summary below, I pair the “big picture” with the news that primarily created the recent “gold rush”.
First, the news:
- Perhaps most importantly—the Fed practically announced that it is about to start a new wave of money printing (QE II). Similarly, Japan is also turning its printing press on again.
- US job market has further worsened (employment fell by 39,000 jobs instead of projected 18,000 jobs increase).
- The gold price broke two important resistant levels: its all time high of $1,250 and also a major new high of $1,300. This break-out has made it clear that gold is not significantly affected by these artificial ceilings.
- The dollar fell consistently against most major currencies throughout September and early October. The US Dollar Index which measures the dollar's strength against a basket of Western currencies slid 7% from 83 to 77.5.
We have been constantly proposing that the current "recovery" in the U.S. and Europe is not sustainable unless governments get serious about fighting the debt situation that in turn weakens their currencies, upsets the markets and makes business planning difficult. Unfortunately, governments have so far only proposed cosmetic spending cuts and instead of taking real measures, they have resorted to Quantitative Easing, i.e. money printing. Paying off debt with money printed out of thin air is a short-term fix that works on paper but also dilutes the value of cash already in circulation. As long as investors don't trust cash and can't expect stable returns from the irritated markets, precious metals such as gold and silver will be the places to store value.
In the past year or so, gold went up on any bad economic news of some significance. Although the first glance may suggest that the economic situation has been stabilized in 2009 and 2010, that's far from truth. Public debt is growing faster than before and so is the running cost of interest. High unemployment means that welfare is costing far more than it normally would be, straining government budgets in the Western countries additionally. The U.S. is far from having dealt with the wave of foreclosures and bankruptcies in the financial sector. Possibly, the worst is yet to come in this arena.
Today, any news that worsens the outlook for the economy or indicates a prolongation of the current state will attract more people to gold. Sadly, we have no reason to expect a return to the good old days of stability any time soon. In other words, we can't expect any improvement within the next couple of years because the current economic policies of Western governments will worsen the situation for many years to come.
With QE II alongside all kinds of new massive government stimuli under-way and in preparation, it seems that the current U.S. administration (both at the Fed and the White House) has given up completely on fiscal discipline. The only goal now is avoid another crash during this election term, at a price of a much deeper recession afterwards. The corresponding moves by the Bank of Japan and the European Central Bank signal that they obediently intend to keep their currencies on par with the sinking dollar.
Hence, if you live outside the dollar area, you have no reason to jubilate either. The deteriorating U.S. economy will eventually pull down most of its Western counterparts as all the major Western economies are strongly interlinked. One currency may do better than another, but in the mid and long term all of them will likely be losing value in terms of commodities, gold and silver—as long as countries don't restore sound monetary policies. Such actions are, unfortunately, not in sight.
Disclosure: Long gold, silver
