Gold pushed to a new seven month high at $1779.30 in overseas trading on Wednesday, after the Bank of Japan -- following on the heels of the ECB and the Fed -- announced an expansion of their own quantitative measures. The BoJ said that they will buy an additional $10 trillion in assets, bringing the total size of their asset purchase program to ?80 trillion.
This move by the BoJ was modestly more aggressive than anticipated, and the yen dutifully retreated. However, gains in the dollar/yen (USD/JPY) rate above 79.00 proved short-lived. Perhaps the muted response to the third significant easing by a major central bank in as many weeks is reflective of growing skepticism that monetary policymakers truly have a handle on the situation.
HOW LONG IS THE PATH?
We just passed the four-year anniversary of the Lehman Brothers' collapse, and the four-year anniversary of the announcement of QE1 is fast approaching, and yet central banks are still heaping accommodation on top of accommodation. Do these policymakers continue down this path indefinitely? Afterall, Y80 trillion in BoJ asset purchases can easily be ramped up to Y100 trillion, or Y200 trillion for that matter. Maybe they reach a point where they throw up their hands and say, "We've done all we can do from the monetary side. It's now time for politicians to make meaningful -- and painful -- fiscal reforms."
That would of course create a whole new set of problems.
Worse yet, maybe the market is waking up to the possibility that what we have on our hands is a burgeoning currency war. I mean, how can a country (or group of countries) expect to gain any advantage if every central bank easing is answered by easier monetary policy elsewhere? Beyond the latest parade of accommodations, the Bank of England minutes released today showed that some members of the MPC "felt that additional stimulus was more likely than not to be needed in due course."
GOLD IS A KEY HEDGE
Beggar-thy-neighbor currency debasement results in a race to the bottom, where nobody wins in the end. However, gold continues to serve as a critical hedge against such debasement.
When QE1 was announced on 25-Nov-08 gold was trading around $816. Slightly less than 2-years later, QE2 was announced with gold at $1368. The yellow metal was at $1784 on the announcement of Operation Twist on 21-Sep-11. And last week, when the FOMC statement revealed QE3, gold was trading at $1732.
SETTING SIGHTS ON $2,000
Gold is already up more than 2% from the QE3 announcement, with the next significant technical hurdle defined by the highs from 29-Feb-12 and 08-Nov-11 at $1790.64 and $1802.89 respectively. Beyond the latter, the all-time high at $1920.74 and the $2000 psychological barrier beckon.
Is the gold standard all it's really cracked up to be? Read a story here.