Mar 13 a.m. (USAGOLD) -- Gold continues to attract good buying interest on dips. Tests below 900.00 early in the week could not be sustained, leaving important chart/Fibonacci support at 890.90/881.74 well protected.
A well-connected market contact noted that miners were actively lifting hedges ahead of 900.00 and that jewelry demand was good as well around this level. However, the latest bounce comes largely as a result of the Swiss National Bank (SNB).
With global interest rates at or hurdling toward 0%, the central banks are forced to resort to "non-standard" measures to stimulate their economies. The Bank of England for example initiated quantitative easing this week -- printing money and buying gilts to drive down interest rates further.
The Fed has repeatedly said that quantitative easing here in the US is being considered. The Wall Street Journal reported this week that the Fed has "taken note" of the BoE's success in lowering 10-year gilt yields as a result of this week's action. Might the Fed be more seriously contemplating printing dollars and using them to support the long-end of the US yield curve?
The SNB cut the target rate for 3-month Libor by 25bp to 0.25% on 12-Mar and are quickly running out of room to maneuver on interest rates. Given the small size of the Swiss government bond market, quantitative easing probably wouldn't be terribly effective. Instead, their "non-standard" measure of choice is apparently direct intervention in the foreign exchange market.
The Swiss franc has been supported of late by considerable safe-haven flows, as investors have sought shelter from the global economic storm. The SNB viewed the rise in their currency as an "inappropriate tightening of monetary conditions" in the face of weak economic fundamentals.
In other words, the safe-haven flows were having a negative impact on their economy, driving up the price of their exports and discouraging tourism. The SNB sought to discourage safe-haven buying of the franc and they did that by aggressively selling CHF in the FX market.
The Swiss franc is effectively no longer a safe-haven because when you convert your euros, kronas or dollars to CHF, you now run the risk of stepping in front of the SNB and another intervention. The EUR-CHF cross lost more 3.5% in value in less than 2-hours on Thursday. That sort of risk does not a safe-haven make.
It also may have cracked open Pandora's box, because if the SNB can intervene to devalue the franc, why shouldn't the BoJ do the same with the yen? Certainly Japanese exports have suffered -- arguably more than Swiss exports -- on safe-haven flows into the yen.
The EUR-JPY cross plummeted 34% between July of last year and the low in January. Is direct intervention by the BoJ warranted? I bet that topic is under serious consideration right now in Tokyo and the yen has softened accordingly. And if the SNB and the BoJ can intervene, why not the BoE and why not the Fed?
The escalation that we have repeatedly discussed over the past year and a half is coming to pass: Rate cut, rate cut, rate cut. Quantitative easing, quantitative easing. Direct intervention...
In response to the SNB action this week, Chris Turner from ING Financial Markets said, "Let the currency wars begin." My opinion is that the war began a while ago, but direct intervention is certainly a provocative raise in the stakes. Another layer of uncertainty in a financial crisis fraught with uncertainty -- just the situation where one needs a safe-haven.
With CHF off the table as a safe-haven and risk that JPY may follow the same path, where does a world looking for some safety, some stability, turn? The dollar is likely to be underpinned at least initially by the latest turn of events, but the reality is that the Obama administration also wants a weaker currency in order to protect US exports.
Given the heightened expectations of quantitative easing here in the US, along with massive monetary expansion to fund various bailouts, liquidity schemes and stimulus -- one has wonder if recent dollar gains can be sustained. Is the low yielding and vulnerable dollar really where you want to be?
The true safe-haven is gold. Gold held in your possession, where it is not simultaneously a liability on the books of any other person or entity.
With so much uncertainty in the world -- and dwindling safe-haven alternatives -- gold's appeal as a safe store of wealth is undeniable.
