Central Bank Efforts Are Stimulating ... for Gold's Price

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Includes: EWJ, FXI, GLD, PSAU, XLF
by: David Goldman

On Tuesday, Japan joined the US, Europe, and China in monetary stimulus:

TOKYO — Japan’s central bank unveiled a surprise monetary-easing effort Tuesday that could inject as much as $115.68 billion into an economy facing deflation and a soaring currency, but the move failed to impress financial markets or economists eager for bolder action.

The Bank of Japan’s move followed increasing pressure from Japan’s new government and came amid growing pessimism surrounding the country’s economy. Japan has posted two straight quarters of economic growth and has seen a resurgence in demand for its exports. But declining consumer prices and the yen’s strength against the dollar have raised concerns that Japan could slip back into recession.

China, meanwhile, made clear that it would neither allow the yuan to strengthen against the dollar, nor would it take any significant action to reduce bank lending (despite occasional expressions of concern by regulators about possible buildup of bad debt). Next year’s money supply growth will be “only” 16% to 17%, according to the China Securities Journal:

SHANGHAI, Dec 2 (Reuters) - New bank lending in China may fall to around 6 trillion yuan to 7 trillion yuan ($880 billion to $1 trillion) in 2010 from roughly 10 trillion yuan this year as the economic recovery takes firmer hold, the China Securities Journal said on Wednesday.

The estimate was based on the premise of 16 to 17 percent growth in the broad money supply next year, the newspaper cited unidentified experts as saying.

New loans could reach about 8 trillion yuan in 2010 if broad money supply grows 20 percent, it said.

Strong bank lending is an important factor underlying China’s quick economic rebound from the financial crisis and its new loan figures are carefully scrutinized by global investors.

After an unprecedented surge of 7.37 trillion yuan in new loans in the first half, Chinese banks, almost all of which are state owned, have slowed their pace of lending in the second half.

Policymakers are concerned over a possible rise in bad debts if break-neck lending continues and that money from some loans may be going into property and stock market speculation rather than being used for real economic activity.

Europe, meanwhile, is pushing for monetary stimulus to continue everywhere:

A delegation led by Eurogroup chief Jean-Claude Juncker, European Central Bank head Jean-Claude Trichet and economic and monetary affairs commissioner Joaquin Almunia has also urged a “gradual and orderly” appreciation of the yuan. It has also warned China to be careful with its exports - often much cheaper than those of other countries - to avoid provoking a protectionist backlash, in the talks held in the eastern city of Nanjing.

“We are considering the moment has not yet arrived to withdraw the stimulus packages that are under way in various parts of world,” Juncker told a news briefing on Sunday after the meeting between EU officials and Chinese economic managers.

Europe’s central bank president Jean-Claude Trichet, to be sure, has been talking about the need for euro-zone national governments. But he and his European Commission colleagues delivered precisely the opposite measure in Asia.

As for the Fed: its securities portfolio increased to $1.785 trillion as of Nov. 25 from $1.480 trillion on August 26, a 21% rise in just three months, that is, an annual compounded rate in excess of 100%.

Given the simultaneous effort of all the world’s major central banks to pump money into the system, the rise in the price of real assets is no surprise. It’s also no surprise that financials are lagging (because the weakened financial system isn’t in shape to handle a new bubble) while inflation hedges are outperforming.

XLF (Finance ETF) vs. PSAU (Precious Metals ETF), Past Three Months:

Chart for PowerShares Global Gold & Prec Metals (NASDAQ:<a href='https://seekingalpha.com/symbol/PSAU' title='PowerShares Global Gold and Precious Metals Portfolio ETF'>PSAU</a>)

My mantra since August has been to unload financials (I note that Citigroup (NYSE:C), my previous largest speculative play, languishes at just over $4, which is what I think the stock is worth) while gold (by far my largest play at the moment) continues to rise.

As long as all the central banks of the world conspire to shovel money into the system the bubble will last — but the biggest beneficiary of the bubble will be gold and related hedges.

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