Gold prices, oil and moribund Euro

The price of gold or the price of success?

In brief: Gold prices experienced during take-off on the background of the negative currency exchange and stock markets.

Many years ago … Amid ongoing concerns over a dozen years of growth preceding the crisis, seem to be those responsible for making monetary decisions a paradise on earth. Then they almost nowhere to be mistaken. They were walking on the heels of such giants as Paul Volcker, who in the 80′s. successfully defeated the Great Inflation by restrictive monetary policy and restore confidence to the central bank.

It is important to note that its success in achieving price stability, they were partly obliged favorable combination of external, does them no fault of their factors: globalization, the weakening of control and the miraculous growth of production – all this is to keep inflation under control even in the expansionary monetary policy. Due to this, central banks could do two conflicting things: aggressively lowering interest rates at the time of the appearance of signs of financial crisis or recession, and after that – very slowly raise them, without generating inflationary pressures, and without compromising reliability. In the eyes of the public who watched these complex concepts, central banks began to look like “magicians” on economic and financial market.

The secret of the magician revealed: Unfortunately, many recognize (and including central banks), that these actions paved the way for a giant bubble in asset prices and credit. Cost them a break, and mankind began to live from crisis to crisis: first, credit and banking crisis, then the Great Depression and the crisis in emerging markets, and now – the crisis of government debt in Europe. For a long time central banks were forced (by circumstances or Government guidance) to keep the monetary floodgates open and go on an unprecedented and innovative measures, we are more inclined to believe that the crisis of confidence in banks and national governments inevitably degenerate into a crisis of confidence in central banks, which act as a savior of last resort for banks, and governments. Yes, central banks may give unlimited money to banks and governments. But this is done through the issuance of a growing number of its own debt. Banks and government have undermined the credibility of its bonds, letting them in too large quantities, the same fate, in our opinion, waiting for the money, if central banks do not stop printing money.

The price of gold and exchange rates reflect the loss of confidence: The loss of confidence in the value of paper money almost immediately reflected in the price of gold and exchange rate. Based on these criteria, the process has already started long ago. The price of gold has almost doubled since pre-crisis level in early 2007, regardless of the units of measurement – U.S. dollars, euros or pounds. Exchange rate, ie the relative value of paper money, too, has changed under the influence of loss of confidence. Last year, when the Fed began to quantitative easing and the active asset purchase, and the ECB chose the less risky option of “passive” quantitative easing, the dollar fell noticeably against the euro. This year, the Fed turned its program to purchase assets, and the ECB is forced to behave more aggressively, increasing liquidity, and buying government bonds (though not to such an extent as the Fed), the euro is again at a disadvantage compared with the dollar .

Inflation is still low … Meanwhile, the value of money in the domestic market in the form of purchasing power in terms of products and services remained relatively stable due to low inflation, especially in the U.S. and Europe. But these few people are surprised, considering that this year the world economy is only beginning to rise from the bottom of the deepest recession in the postwar period. Moreover, all this does not inspire any confidence, because monetary policy has remained weak throughout the world, despite the economic recovery. We believe that the crisis of sovereign debt for a long time will limit the actions of the ECB and the Fed, which in turn does not allow central banks in many developing countries to tighten monetary policy.

… But Britain can serve as a leading indicator: Oddly enough, the highest inflation rate among the Big Ten is observed in Britain, where inflation rate is 3.7% – well above the target of 2%. Even if you do not take into account the increase in VAT (assuming it will have a moderate effect), our economists believe that the CPI index still remains at a level slightly above 3%. Judging by how the balance of the Bank of England has increased since the crisis began, the United Kingdom showed the most aggressive in terms of monetary policy, while the last few years the pound has fallen significantly against the dollar and euro. In addition, the United Kingdom ignored the popular theory that to raise inflation to actively support the lending and increase the money supply – and both grew up only recently. I recall that last year everyone had forgotten about similar binding conditions for economic recovery, when it begins to excess liquidity was sufficient. The increase in credit and money supply growth in the absence of economic stagnation, of course, will stimulate inflation, but their absence does not necessarily exclude inflation and inflationary risks in the context of such an expansionary monetary policy.

ECB – the latest victim: Recently, attention has shifted to the ECB, which is traditionally perceived as the most independent and reliable among the major central banks. To a large extent people believe the ECB, because he has a sub-national in nature and as a primary objective determines its price stability, producing denationalized currency, without the pressure from the states. However, the credit crisis escalated into a crisis of sovereign debt, which forced the ECB into action that will eventually threaten to undermine its credibility.

Loss of trust: First, the ECB should abandon the rules of collateralized debt obligations, taking the Greek bonds without regard to their credit rating. Obviously, this is an exceptional measure, but obviously the fact that the ECB will be difficult to deny the same support to other countries in the euro area, getting them into trouble. Secondly, the decision to buy government bonds on the “dysfunctional” secondary market is very important, as can be judged by the disagreements that it has created in the Council of the ECB. Despite the fact that the acquisition does not violate the provisions of the Maastricht Treaty, which regulates only direct government loans and buying bonds at auction, they will undoubtedly help governments finance their deficits at a low rate. Thirdly, continuing indefinitely to give the banks liquidity in the form of bonds with different maturities, the ECB is holding up even the weakest players, thereby slowing the important processes of consolidation and recapitalization of the banking sector.

Hostages of financial and fiscal concerns: Of course, in my defense the ECB may say they are afraid of contagion and the potential collapse of the entire system, therefore, does not see any exit from this situation. Nevertheless, such actions lay the necessary adjustments, because banks and governments have come to rely on the ECB as a borrower, which is always be applied at the last minute. But without this adjustment in the form of consolidation of the banking sector, the threat of regulatory intervention (termination of cooperation, minimize the program, etc.), recapitalization of banks (especially those that are state owned) and the major financial reforms, the ECB is likely to remain hostage to their own fears, which will be let him respond to inflationary pressures as they arise. “Lyncher bonds” sleep: In short, in the coming years, central banks are waiting for a hard battle for citizens’ confidence, which will be further complicated by the fact that they were bound hand and foot by their fears about the financial and fiscal stability. Surprisingly, while the price of gold and currency markets are sensitive to these concerns, the bond markets remain calm: they have no shortage of liquidity, which is why they do not seem to lose hope. But this is not the first time: bond markets took years to realize the great inflation in the 70′s. and serious disinflation 80′s and 90′s. Famous “lyncher bonds” again fast asleep.

Ukrainian Globalist
2010-06-14 12:49, Commodities.

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