Gold surged 3% in euro terms yesterday from a low of €1,100 per ounce to a high of €1,144/oz after Mario Draghi unveiled his QE 'bazooka'. The ECB announced it’s much anticipated quantitative easing (QE) programme. The ECB will print over €1 trillion euros to buy up 60 billion euros worth of sovereign bonds every single month from March until the end of September next year.
The ECB’s balance sheet currently stands at about €2 trillion and will be over €3 trillion by the end of the programme. Proponents argue that the move should or will prevent deflation and help revitalise the ailing euro zone economy. It is hoped that QE will counter low euro zone inflation by increasing the amount of money available to financial institutions and to encourage lending by banks.
The aim of QE is to counter disinflation and act as a large stimulus to struggling economies. It should lower the cost of borrowing for European governments, which in theory should increase the availability of credit across the euro zone.
Although interest rates are already at record lows in the Eurozone and globally and yet economic growth remains weak.
It is also hoped that it will potentially boost equity markets. This has happened in the U.S. and UK and more recently in Japan. However, the jury is still out if the “wealth effect” is actually aiding the struggling working and middle classes.
Many have voiced concerns about the ECB QE including Angela Merkel, Axel Weber and Andrew Sentance.
Weber, the former head of the Bundesbank cast doubt on the future viability of the euro. He said that if countries do not follow Germany in imposing structural reforms to boost their longer-term growth rates the euro would not survive.
He called the probable introduction of quantitative easing by the ECB as “only part of the fix.” Weber, now the chairman of UBS, said there were legitimate questions hanging over the viability of the single currency.
Andrew Sentance, formerly of the Bank of England’s monetary policy committee, and now senior economic adviser to Price Waterhouse Coopers, said the euro zone is not the environment where QE is going to be effective.
UK economist Roger Bootle of Capital Economics told the BBC, “I am not the greatest fan of quantitative easing – I don’t think it’s going to cure the European malaise. The point is, there is not much else in the locker.”
Angela Merkel continued to make Germany’s concerns known, indicating once again the lack of consensus among European policy makers.
Germany’s greatest concern from Merkel’s point of view is that Germany does not end up on the hook for losses of defaulting peripheral nations.
Germans believe they should not have to underwrite weaker EU economies debts, via the printing of money by the ECB, while having no executive power over how those failed economies are structured.
“It’s important for me, as a politician, that all signals have to be avoided that could be perceived as weakening the necessity for structural changes and closer economic-political cooperation in euro zone countries.”
The ECB, like any central bank, has limited policy tools. In the wake of the crisis of 2008 the ECB reduced interest rates to zero in a failed attempt stimulate borrowing among populations saturated in debt.
It then engaged in confidence tricks – (the famous “whatever it takes” statement) – in the hope that confidence would make structural difficulties within the EU go away.
The last tool in a central banks arsenal is money printing and so the moment of truth for Mario Draghi has arrived.
The ECB hopes to stoke inflation. The latest statistics suggest that the euro zone is deflating at a rate of 0.2% – a long way from the desired target of 2% inflation. If deflation takes hold it could create a feedback loop that will devour the banks and other leveraged financial institutions.
The interests of the banks and the wider economy are not perfectly aligned. In the U.S., QE has not generated a sustainable, robust recovery because the banks hoarded the cash in an attempt the shore up their balance sheets. At any rate, much of the wider public and companies cannot afford to take on more debt.
As such the money did not trickle down to the real economy and inflation did not take hold. The lesson will soon be learned that wealth cannot be generated by printing money – nor can sustainable economic growth.
Despite two waves of QE from the U.S. and Japan, deflation is taking hold globally. Oil, copper and lumber prices are stagnating indicating very weak economic activity worldwide.
These are the most uncertain times in economic terms, possibly since before World War II. Gold has always performed well in such circumstances. Both as a hedge against stagflation, high and hyper-inflation and as we are seeing today and was seen in 2008 and in the Great Depression – against disinflation and deflation also.
It would be prudent to take heed of these warning signs and acquire an allocation to gold coins and bars in fully-allocated, segregated accounts in fully-audited vaults in the safest jurisdictions in the world.
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