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Gold and silver gain after pre-QE smackdown in prices by the central banks, stocks fall and bonds rally

 -- Published: Monday, 9 March 2015 | Print  | Disqus 

By Peter Cooper

Day One for quantitative easing at the European Central Bank and the sixth anniversary of the start of the bull market for stocks and predictably bonds rallied and share prices fell. Gold and silver rebounded sharply from what was a blatant central bank intervention to dash prices ahead of the latest round of global money printing.

Central banks are a big force in the precious metalsí market to support the value of the paper money that they issue. Big orders placed on their behalf by the major bullion banks at critical moments reap havoc with pricing set by supply and demand. But then breaking the natural price setting mechanism for interest rates and assets is what the central banks are about these days.

Day One ECB-QE

Eventually the central banks will lose control of financial markets. However, there was no sign of that on Day One of ECB-QE with the renewed wrangling over the Greek debt crisis causing barely a ripple in the pond.

Where the danger signals are starting to flash if you care to look is in the currency market. The euro dropped to $1.085 last Friday, a 12-year low, and everybody wants to know just how low will it go now that the ECB is printing $60 billion-a-month.

Eurozone gold investors are already sitting pretty with accelerating gains in the yellow metal. German retail investors are particularly fond of gold as a hedge against devalution.

Dollar pricing

But because gold is priced in dollars this appreciation in value for the worldís first currency is ignored, and the manipulated hit to a three-month low last week is the headline read in the financial press.

Asian investors were quick to grab gold at bargain prices when their markets opened on Monday, knowing another gift from the central banks when they see it. Still the bigger picture under ECB-QE is not so easy to fathom for precious metals.

In theory QE should be supportive for bonds and equities and take precious metal prices up too. Gold and silver are the only currencies that cannot be printed by the central banks and their powers of manipulation are therefore ultimately limited. Money printing can become unlimited in scale.

Final countdown

Taken to its logical extension QE will blow up both equity and bond markets by reducing the return-on-investment below that investors can accept. If these assets are dumped for cash then hyperinflation would quickly take off and the only available protection from that phenomenon would be hard assets like precious metals and real estate.

But what we donít know is just how long this is going to take. It is now year six of the bull market for stocks. Thatís already a bit long in the tooth. Markets running on QE need more and more of it until they just canít get enough. Perhaps we are now getting close to that tipping point.

Many already question whether ECB-QE will achieve very much for the economy. Yet even that modest positive impact will soon turn negative, unless classical Austrian economics is a complete nonsense.

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 -- Published: Monday, 9 March 2015 | E-Mail  | Print  | Source:

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