2012-JAN-23
After recording decent gains at the end of last week, gold and silver prices have continued rallying higher in trading this morning, as hedge funds' “risk” appetite increases and more are drawn back into the long side of stocks and commodities.Markets appear at last to be digesting the fact that the European Central Bank is little different from the Federal Reserve or the Bank of England when it comes to fear of deflation – despite all the media blather about its supposed Teutonic “hard money” inclinations. Credit Suisse speculated in recent days that the next “Long-Term Refinancing Operation” conducted by the ECB will could involve as much as €10 trillion’s worth of loans to eurozone banks, though others are more cautious in their estimates. Banks pay miniscule interest rate on these three-year loans – the ECB’s current borrowing rate of 1% – that essentially enables them to recapitalise, and (it is hoped) continue to invest in European sovereign debt.
This is slightly more subtle than the more blatant form of debt monetisation practiced in the US and UK, owing to German sensibilities on these matters. But this distinction is a trivial one in the bigger scheme of things.
In similar vein, markets are growing increasingly hopeful that the Fed could be on the verge of announcing a dramatic new stimulus move, with Reuters reporting this morning that it could take “the historic step this week of announcing an explicit target for inflation, a move that would fulfil a multi-year quest of the central bank’s chairman, Ben Bernanke.”
As Reuters points out, in practise economists at the Fed already believe that prices should rise in the range of 1.7 to 2% a year, so this is merely making de jure what has previously been de facto. Nevertheless, this is serving as another reminder to market participants (as if one was needed) that the Fed will print as many dollars are necessary in order to ward off deflation.
The bigger “hope” for markets is that Bernanke will soon unveil plans for nominal-GDP targeting – a form of perpetual quantitative easing that would be insanely bullish as far as precious metal prices are concerned. We discussed this in more detail at the beginning of the year. Tuesday and Wednesday’s Federal Open Market Committee meeting will provide important clues as to whether or not this policy is coming closer to fruition.
