Gold Price Stabilizes As European Central Bank Announces Quantitative Easing
Gold and silverbugs are starting to think things are changing in the precious metals market, even if most commodities are still a bit off. That demand has increased is typical for December, but prices are higher than they’ve been in quite awhile. Five months in fact.
Let’s look at what the Mint has done. Typically, sales go up in January because sales were suspended mid-December.
The US Mint moved 42,000 ounces of American Eagle one-ounce gold coins in just the first few days of January, which is significantly higher than the 18,000 Eagles the Mint sold in the whole of December.
That figure also represents half the entire figure of last January which was 91,500 ounces.
“January is traditionally a strong coin sales month in the US,” Commerzbank said.
Last year, the US Mint moved 524,500 ounces of American gold eagle coins, a drop-off from 856,500 in 2013.
The US Mint has moved 16,500 ounces of its 24-carat one-ounce American Buffalo bullion coins so far in January, up from 4,500 in December.
All of this has resulted in a gold price above $1,300 for the first time in five months – the first time since August 2014.
“Geopolitical risk is as high as its been in many of our lifetimes” said Marc O’Byrne, research director at Goldcore Ltd, told RT. “The policy of response that we tend to see from the central banks, particularly the Western central banks and the Fed, the Bank of England, the Bank of Japan, and now the ECB. Their policy tends to be to decrease interest rates, and they’re now nearly zero percent in the Western world,” he said “That’s the primary driver of high gold prices.”
“The more you create something, the less it will be worth in the long-term,” said O’Byrne. “So if you print trillions and trillions of dollars, pounds and euro, they will have less value over the long-term.”
“Gold is both a commodity and a currency, it’s very rare, and most people have no idea how rare it is,” he added. “That’s why it has retained its value throughout history.”
“The advice is you always put 5 to 10 percent of your wealth in gold. You hope the price for gold doesn’t go up very sharply because it generally means the rest of your wealth is not doing well. So that’s a very good hedge and diversification,” he said.
“If you see what happened to the Swiss franc vs. the dollar and the euro there last week, the Swiss franc rose by 40 percent against the dollar in about 13 minutes. So if it happened for the Swiss franc vs. the euro and the dollar, this can also happen for gold,” he said.
Jim Rickards saw the same:
#Gold just ticked over $1300. Maybe the central banks are supporting the price to encourage “inflationary expectations.”
— Jim Rickards (@JamesGRickards) January 21, 2015
The trend continues with Mario Draghi’s quantitative announcement. It has been a long-time coming. As Bloomberg reports:
Draghi said the ECB would buy 60 billion euros ($69 billion) a month of public and private euro-area bonds until September of next year. Outright sovereign QE — that is, the purchase of government debt — will begin at last. The implied increase in the central bank’s balance sheet, more than a trillion euros, is more than ECB officials had previously indicated. Draghi was frank, too, about why the ECB was acting. He went into some detail about the increase in deflationary pressure that the new QE program is intended to confront.
That was the right combination: a clear understanding of the nature of the problem and sufficient resolve to attack it. Unfortunately, Draghi then undid some of the benefit by piling on needless complications. These will lessen the program’s impact on inflation expectations — the main channel through which QE is supposed to work.
Draghi said the asset purchases “are intended to be carried out until end-September 2016 and will in any case be conducted until we see a sustained adjustment in the path of inflation.” Is that a promise to buy 60 billion euros of assets a month for as long as it takes to raise inflation? If not, is it at least a promise to buy 60 billion euros a month until September of next year? Maybe it’s neither. An “intention” is not a commitment. And if the program was going to be sustained until it raised the inflation rate to the ECB’s target of close to 2 percent, why mention a date at all?
Asked to clarify, Draghi wouldn’t elaborate. Every word in the statement had been carefully chosen, he said. No doubt — and therein lies the problem. The wording was chosen to allow supporters and opponents of QE on the ECB’s governing council to express some measure of agreement. The ambiguity is deliberate, and it makes the program less forceful…
…The surprising scale of the program is the main thing. Inflation expectations, according to a standard measure, inched up a bit after Draghi had spoken; the euro fell and so did bond yields, all as intended. After long and unforgivable delays, the ECB has finally done it. What a shame that, even now, it will be QE with European characteristics.