Tuesday, September 28, 2010

I'd Say Gold (GLD) and Silver (SLV) are Overbought but Bank of England Official Chimes in on Race to Bottom for Fiat Currencies

It is one thing to make predictions that you think will come true, but are far out of the mainstream, and it is quite another to see them happening before your eyes.   Once the consensus (in early 07 in fact!) was home prices could never fall nationally because... well, they had not in the past.  Pundit after pundit came on CNBC expressing the view.  Meanwhile, I said home prices were wildly inflated versus historical trend and would stage a tremendous national drop.  [Dec 2007: Analysis - What Should Median Home Prices Be Today?]   Three years later you see who was correct..... and it was not the CNBC crowd.  But saying it, and then watching it play out so dramatically was another thing.

Maybe 15 months ago I said gold would rally but not for reasons people were using at the time - i.e. inflation.  Instead it would be as a reserve currency as central bankers went wild as there would be no real recovery and central bankers became increasingly desperate.  Now in the past 3 months, I hear everyone talking about gold as a reserve currency... what was unthinkable a year and a half ago has become consensus.  Again, it is one thing to predict something and quite another to see central bankers attempt to destroy their country's currencies and the living standards of their citizens along with it.  All 4 of the major developed central banks have done, are doing, or are planning to do more of it.  Brazilian officials said just as much earlier this week as emerging markets are receiving much of this fiat money (Brazil, after raising taxes against capital inflowsto offset Bernanke's QE1, is now considering another round to offset this next iteration!) .

  • Brazilian Finance Minister Guido Mantega said the government will buy all “excess dollars” in the market to curb the real’s appreciation as governments around the world engage in a “currency war.”
  • We are experiencing a currency war,” Mantega said. “Devaluing currencies artificially is a global strategy.”
  • “There is a very serious currency problem, which should be addressed,” Meirelles said today. The central bank and the Finance Ministry “agree that’s not something Brazil should pay the price for.”
  • “We should have a balanced global economy,” Meirelles told reporters today in London. “We can’t have some countries having their currencies weakened. Evidently, we’re going to have a few countries paying the price for that.”
  • Brazil’s government is considering increased taxes on capital inflows in a bid to stem the real’s rally as other countries adopt policies to weaken their currencies.  Brazil’s government last October slapped a 2 percent tax on foreign purchases of equities and fixed income securities to fend off what Mantega considered “excess speculation” involving the real.

These type of actions by the Fed, BOE, and BOJ were not part of the ECB charter (ECB was once viewed as the central bank that actually cared about their currency) but even the European central bank is out there buying sovereign debt at auctions so we can pretend "all is well" when these outlier countries try to float sovereign debt.  (wow look how well the auction went!  It's amazing how good they go when the ECB is buying)  Hear no evil, see no evil, believe no evil.

Hence a conundrum... gold and silver continue to rocket for GOOD reasons.  No one can find a reason that gold should go down anymore because of what central banks are engaging in.  But now everyone is on the same side of the trade (know any gold bears?).  So in many ways this becomes a much harder trade now than before... even if in the long run the central bankers will continue to punish their paper currencies and make gold ever more valuable, do we believe it just happens in parabolic fashion?  Good question, I don't know.  Rarely does a trade no one is against keep working.

Today a Bank of England official was the latest to jump on the "we piss on all paper money" parade.  If you choices are limited to one of the major global currencies - dollar, pound, yen, euro - I don't know which poison you would pick.  Each central bank is panicking as the 'recovery' rolls along in fine fashion. It truly is funny how the bulls have their cake and eat it too ... the global economy is just fine thank you.  So fine in fact (recession "over" 1.5 years ago!) that we need to continue to print paper money as if its going out of style.  Yep, that sure is a signal of "health".

Via Bloomberg:

  • Bank of England policy maker Adam Posen said the central bank should restart its asset-purchase program to prevent persistent slow economic growth.  Posen said the U.K. central bank should consider buying gilts in its initial effort to do more so-called quantitative easing, though purchases of private assets may be needed later.  (re-read that last part.  Then re-read it again.  And again!)
  • U.K. policy makers signalled this month that they’re closer to adding stimulus to the economy after they held the key rate at 0.5 percent and their bond- purchase plan at 200 billion pounds ($317 billion).
  • “Additional monetary stimulus at this point should begin in the form of additional QE as the Bank of England pursued by purchasing gilts in 2009-2010,” he said. “In case such QE were to prove insufficiently effective,” Posen said he would “still want preparation ahead of a Plan B of large-scale non-gilt asset purchases” in close coordination with the Treasury.
  • Posen’s call for action comes a week after the U.S. Federal Reserve said it’s prepared to ease monetary policy further if needed and has highlighted asset purchases as one option. The Bank of Japan may also discuss more steps to ease monetary policy at its meeting next week.

With talk and actions like this you can see why precious metal investors fell "Bulletproof"

Long gold in fund; no personal position

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