As was widely expected, the European Central Bank has started a program of Quantitative Easing, something which the ECB vowed it would never even consider when the supranational institution was created. Situations can change and less than 10 years after its incorporation the central bank already had to deal with the worst financial crisis on the markets in decades.
Back in 2008 it already looked like the ECB was very hesitant to get involved on the market and the Eurozone was very fortunate to see a lot of spill-over effects of the quantitative easing program of the Federal Reserve, its American counterparty. Fast forward to 2012 when the Euro-crisis started to erupt and the collapse of Greece and the sky-high interest rates in other countries forced the ECB’s hand and a hefty market reaction was absolutely necessary.
When you look back at the past 5-8 years, these two events have actually paved the way for the ECB to take drastic measures like the announcement of a 1.1 trillion quantitative easing program over the next 18 months. The central bank will now start to pump 60B EUR per month ($70B) in the financial system which is more than expected. This means the total value of the Quantitative Easing program will be roughly $1.26B or approximately 10% of the total GDP of the Eurozone in just 1.5 years.
This could prove to be very effective, but the main question will be whether or not the full amount (or even half of that amount) will effectively trickle down to the ‘real’ economy. There are approximately 340 million inhabitants in the Eurozone, so the total size of the ECB’s Quantitative Easing project means that the ECB will print in excess of 3000 EUR per inhabitant. As this will be completed in just 18 months time, this is huge. Unfortunately there will be a lot of ‘middle man’ with sticky fingers and it’s increasingly likely the banks will simply deploy a large chunk of the QE money on the capital markets for their own benefit, instead of acting as an ECB agent to use the funds for what they were intended to be.
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The Euro started to tumble versus the US Dollar when reports of Quantitative Easing emerged as the currency dropped by 11.5% in value in just 3 months time and seems to be on its way to reach parity.
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What’s more important to discuss, is that once again gold has proven to be a safe haven for someone who wants to protect his wealth from a sudden currency depreciation. If we look at the 30 day price of gold in EUR, we see it moved up from 960 EUR on December 25th to a stunning 1149 EUR per ounce as of the market close on Friday which is a 19.7% jump in just one month time. A part of this was caused by an increased gold price expressed in USD, but this accounts for only 9.2% of the increase, so less than half. Another (partial) explanation is the ‘crash’ of the Euro against the Dollar, but this also had an impact of just 8.1%, so if you add both numbers, only 17.3% of the jump in the gold price can be explained by the two biggest forces in determining the gold price. This means that even if the gold price expressed in USD wouldn’t have changed, the purchasing power of a gold owner in the European Union would have increased even though the Euro lost almost 10% of its value.
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This story is now focused on the Eurozone, but the United States might soon be in the same position. Right now, the USD is considered to be a safe haven currency, mainly because people are ignorant and believe the economic growth-story of the US government. But this charade might soon be over as the reality will set in. The Debt/GDP ratio of the USA is now a triple digit percentage and the budget deficit will only increase.
Gold has always proven its value. In Japan, more recently in Russia and last month in the Eurozone, the purchasing power of the citizens was safeguarded by their gold holdings. Whenever a country is in distress, gold keeps its value.
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