Are central bank monetary policies bolstering gold bullion prices?
*The Economist , August 13, 2011
”ADDICTS always crave one more hit. With stockmarkets slumping over the past two weeks investors hoped that the Federal Reserve would unveil a third round of ”quantitative easing” (QE), the creation of money to bolster asset prices, on August 9th. The second round, announced in August last year, had triggered an equity rally in late 2010.
Instead of pure heroin, investors got methadone in the form of a commitment from the Fed to keep rates at their current low levels for another two years. While Wall Street managed a late rally on the day (the Dow gained almost 430 points, or 4%), the Fed’s hit gave only a brief rush. Share prices resumed their fall on August 10th.
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There was a more sustained reaction to the actions of the European Central Bank, which started buying Italian and Spanish government bonds on August 8th. Though the size of the buying programme was unknown, the effect on the bond markets was dramatic. The Spanish ten-year yield fell from more than 6% to 5% within two days.
At least the central banks are having a positive effect, however temporary. Politicians, meanwhile, have left investors with serious doubts about their ability to handle the crisis. European leaders have moved from an initial stance of denial about the seriousness of the region’s debt problems through a series of sticking-plaster solutions as the rot spread. American leaders, for their part, flirted with the prospect of a default before reaching a deal that neither helped the economy in the short term nor did enough to improve the government’s finances in the long term.
Worse still, their approach has seemed chaotic. ”Investors have ended up betting on the political outcome as opposed to making decisions on the basis of the fundamentals,” says Ian Harnett of Absolute Strategy Research, a consultancy.
There has been an inevitable effect on confidence. According to The Economist/FT global business barometer, a survey of business confidence, political risk is the second-biggest concern (after the economy) for executives. Between May and July, the proportion of businesspeople expecting global conditions to improve over the next six months fell from 38.3% to 23.2%; those expecting a deterioration rose from 19% to 33.7%.
Moreover, the Fed’s low-rate commitment is a sign of its concern about the health of the economy���hardly a bullish signal for stockmarkets. By the time it had reached its high for the year on April 29th, the S&P 500 had doubled from its March 2009 low. A setback was only to be expected, especially since government-bond yields (outside the euro-zone periphery) have been falling in recent months, marking concern about the economic outlook.
Risk aversion has also shown up in the price of gold, which has hit repeated highs, and in the strength of the Swiss franc, which reached a record against the dollar on August 9th despite the efforts of the Swiss National Bank to let it weaken.
In contrast, other commodity prices have fallen by 12% since April 26th. That is a potential silver lining for developed economies, since higher raw-materials prices have acted as a tax on consumers.”
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