Gold has pushed more convincingly below the $1600 level, adding to the losses that began last week while Asian investors were out for the Lunar New Year holiday. With the yellow metal setting new seven month lows, one might reasonably expect Asian physical buyers to step back in and underpin the market.
After all, this is the way things have unfolded pretty consistently throughout this long consolidative period. Selling in the paper market is met by physical buying, which drives the metals back up into the range. Right now though, the paper sellers seem to be overwhelming the physical buyers.
Perhaps that’s not surprising given that conservatively there are 100 ounces of paper gold for every actual ounce of physical gold. Nonetheless, given the proximity to the range bottom at 1522.48, some buyers may be standing aside and waiting for the market to push deeper into oversold territory and find support.
In reading the headlines today, it would seem that rosier expectations for the global economy are driving this sell-off, prompting investors to rotate out of safe-haven assets and back into the stock market. While there have been some “green shoots” of late, it’s worth remembering that the preliminary indication on U.S. Q4 GDP was a negative number. Additionally, Japan and Europe are already in recession.
My sense is that much of the recent tailwind for stocks is actually being provided courtesy of ongoing easy monetary policy. In 2011 Fed chairman Ben Bernanke memorably pointed to the performance of U.S. stocks as proof of the effectiveness of quantitative easing. “Policies have contributed to a stronger stock market just as they did in March 2009, when we did the last iteration of this. The S&P 500 is up 20% plus and the Russell 2000, which is about small cap stocks, is up 30% plus,” said Bernanke.
Just last week, Japan’s economic minister Akira Amari took a similar position, stating that the government wanted policies implemented to “to help stock prices rise.” More specifically calling for 13,000 in the Nikkei by the end of the fiscal year.
With all the weight of some of the world’s biggest central banks seemingly behind equities, I suppose it’s not surprising that investors are inclined to hop on board for the ride. However, these gains in the stock market are largely being accomplished through currency debasement, which gets us right back to talking about a currency war.
While both the G7 and G20 attempted to address rising concerns about a burgeoning currency war in recent weeks, it is a phrase that remains on the lips of many. In not singling out anybody in particular for sanction — and how could they when everyone is guilty — it could be read as a tacit approval of devaluation policies.
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