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-- Posted Thursday, 19 March 2009 | Digg This Article | Source: GoldSeek.com

The surprise move to quantitative easing by the Federal Reserve yesterday caught the market unaware. The $300 billion bond purchase sent gold prices jumping $50 an ounce and must have given a few gold bears a nasty awakening.

Gold prices will surely now go higher as the market digests what the start of printing dollars means for the USA. The Bank of England started printing money a week earlier and its success in lowering yields perhaps encouraged the Fed to take this step into the abyss.

Inflation objective?

For an inflationary abyss is what opens up if these central banks have got their calculations wrong. Or is it that the central banks now think their banking systems are in such bad shape that a good dose of inflation is the only thing that will sort them out?

The Fed sent bond yields tumbling 0.5 per cent just as the Old Lady of Threadneedle Street managed to accomplish. However, the US dollar also took a three per cent tumble, following the pound in yet another competitive global devaluation.

Bond holders gained capital value as yields fell but that gain was immediately eroded by the currency fall. Is this a pattern that we are going to see repeated with more and more printing of money via quantitative easing?

There really is no such thing as a free lunch in economics. Countries with massive budget deficits should be cutting expenditure, and not borrowing more.

Buying up your own debt is no more useful that swapping one credit card for another. It is nothing close to sound finance. It is the last act of desperation when there is nothing else left to do.

Inflation and debt

You do not need to be highly qualified in economics to see where this is leading. You flood an indebted banking system with money, you get inflation and the relative value of fixed debt goes down.

But this is not a magic bullet. You get inflation back in the system, and anybody on a fixed income becomes poorer as prices rise. If you are an investor your dollars become worth less, and eventually worthless.

That is why the gold price jumped yesterday. And it is going to go a lot higher as investors reach for a safe haven. Beware being left sat on cash when you should be owning gold and silver as a hedge against desperate actions by the central banks.

-- Posted Thursday, 19 March 2009 | Digg This Article

About Peter Cooper:
Oxford University educated financial journalist Peter Cooper found himself made redundant by Emap plc in London in the mid-1990s and decided to rebuild his career in Dubai as launch editor of the pioneering magazine Gulf Business. He returned briefly to London in 1999 to complete his first book, a history of the Bovis construction group.

Then in 2000 he went back to Dubai to become an Internet entrepreneur, just as the dot-com market crashed. But he stumbled across the opportunity to become a partner in www.ameinfo.com, which later became the Middle East's leading English language business news website.

Over the course of the next seven years he had a ringside seat as editor-in-chief writing about the remarkable transformation of Dubai into a global business and financial hub city. At the same time www.ameinfo.com prospered and was sold in 2006 to Emap plc for $27 million, completing the career circle back to where it began a decade earlier.

He remains a lively commentator and columnist as a freelance journalist based in Dubai and travels extensively each summer with his wife Svetlana. His financial blog www.arabianmoney.net is attracting increasing attention with its focus on investment in gold and silver as a means of prospering during a time of great consumer price inflation and asset price deflation.

Order my book online from this link

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