-- Posted Wednesday, 3 December 2008 | Digg This Article
| Source: GoldSeek.com
The Morning Gold Report by Peter A. Grant
Dec 03 a.m. (USAGOLD) -- Recent comments by Fed Chairman Ben Bernanke suggest that he is prepared to monetize debt as the government continues to flail about searching for a way to mitigate the current financial crisis. One thing is for sure, the Fed and Treasury have yet to regain control of credit markets and therefore the crisis is far from over.
Government purchases of US treasuries with freshly printed dollars bolsters the argument that the Fed is heading down the path of quantitative easing -- a likelihood first raised on this page late in October after Fed funds were dropped to 1%.
Since then, the effective Fed funds rate has dropped to around 0.33%. With Fed funds futures for Dec trading at 0.3925, another 50bp rate cut is fully priced in -- and then some -- for the upcoming FOMC meeting on 15/16-Dec. If the Fed does indeed cut, it is likely to drive the effective rate below 0.25%.
The contents of the policy statement are going to be interesting to be sure. It seems unlikely that the Fed will directly refer to quantitative easing and/or debt monetization within the statement. My guess is that they come up with some new esoteric language to describe these new monetary policy initiatives, perhaps even some new acronyms. I like, MEaTPF (Monetary Expansion and Treasury Purchase Facility).
The Bank of Japan utilized quantitative easing early in the decade, lowering interest rates to 0% in 1999 and then flooding banks with excess liquidity in the hope of stimulating lending. This policy was somewhat successful in stabilizing the banking system in Japan -- by providing the banks with a large supply of excess reserves. However, it was largely unsuccessful in stimulating borrowing and lending, leading to what is now referred to as Japan's 'lost decade.'
During the lost decade the Japanese government also thwarted their own best efforts to revive the economy by subsidizing failing banks and businesses, creating what became known as 'zombie businesses.' Does this sound at all familiar?
Investment flowed out of Japan in search of a higher rate of return. This is when the yen carry trade -- borrowing at a low rate in Japan to invest those funds elsewhere -- came into being.
We've seen the yen carry trade largely unwound in recent months as interest rates in the US and around the world hurdle toward 0%. However, one has to wonder if the dollar might at some point be the short side of a new carry trade. Perhaps a dollar-yuan carry opportunity may emerge.
Effectively the Fed has declared all-out war on deflation, choosing to risk hyperinflation instead. With all of the new liquidity in the system, the sustainability of recent dollar gains are certainly suspect. Given the dismal US stock market and tumbling rates on US treasuries, there's not much that can be considered dollar supportive.
If the dollar does indeed resume its long-term downtrend, more and more investors are going to be turning to physical gold as a hedge. We are already experiencing unprecedented investment demand for gold and a tight supply situation. If we get an additional boost in demand, prices are going to have to adjust rather significantly higher to accommodate further buying interest.
Gold Market Movers:
US ISM NMI for Nov plunged to 37.3, well below market expectations, versus 44.4 in Oct.
US ADP employment survey for Nov tumbled 250k.
US Q3 productivity revised up to 1.3%, above market expectations.
US MBA mortgage index surged 112.1%; refis +203.3%, purchases +38.0%.
Eurozone retail sales worse than expected at -0.8%.
UK services PMI for Nov weaker than expected at 40.1.
Eurozone services PMI for Nov revised lower to 42.5 from 43.3 previously.
UK Nationwide consumer confidence for Nov falls 6 points to a new series low of 50.
Bank of Thailand slashes rates by 100bp.
'Bernanke-san' signals policy shift, evoking Japan comparison
SNB looks for new tools in zero interest-rate world
'Structural deficit' in gold supply could send prices higher
Gurus take a shine to gold
Gold will rise to $2,000 by 2010: Investor
