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ECB Buy Gold Bullion? Japan's Monetary Policy Dubbed "Ponzi Scheme"

Commodities / Gold and Silver 2014 Nov 18, 2014 - 06:12 PM GMT

By: GoldCore

Commodities

Concerns about deflation, recession and a return to the Eurozone debt crisis, may see the ECB follow Japan and print money to buy assets including shares, exchange traded funds and physical gold.

Counter intuitively, gold prices fell on the quite bullish news. In marked contrast to the sharp falls gold saw on the mere rumour of small Cyprus selling their miniscule gold reserves. Such odd trading leads to continuing concerns that the precious metals markets are still being manipulated.


Over the last couple of months, the ECB has launched several measures to revive the lacklustre euro zone economy. Mersch said the bank should let these steps take effect first before considering more action.

If more action was needed, the ECB's hands wouldn't be tied as it could theoretically purchase government bonds or other assets such as gold, shares, or exchange traded funds (ETFs).

But he said the bank was not determined to buy up assets come what may and should consider its actions carefully. He warned about the negative side effects were the central bank to start buying up government debt, urging political leaders instead to reform their economies to boost growth.

"Easing of monetary policy cannot work effectively when the European economy is structurally not in good shape," Mersch said in a speech at an annual banking conference in Frankfurt.

There appears to be an ongoing tussle between the ultra dovish such as ECB President, Mario Draghi and the slightly less dovish members of the ECB.

Mario Draghi has explicitly cited government bond buying as a policy tool officials could use to further stimulate the economy should the outlook worsen again.

“Unconventional measures might entail the purchase of a variety of assets, one of which is sovereign bonds,” the ECB president said in Brussels yesterday in answer to a question during his quarterly testimony to lawmakers at the European Parliament.

Draghi and the uber doves appear determined to ignore the failure of QE in both the U.S. and Japan.

The architect of Japan's radical economic policies - ‘Abenomics’ - Koichi Hamada has described the recent bond buying binge by the Japanese central bank as a ponzi scheme: 

“In a Ponzi game you exhaust the lenders eventually, and of course Japanese taxpayers may revolt. But otherwise there are always new taxpayers, so this is a feasible Ponzi game, though I'm not saying it's good.”

Japan's GDP tanked an incredible 7.4% last quarter and social tensions are rife. Like in the U.S., the primary beneficiaries of Japan's ultra-loose monetary policies have been speculators, investors and the ultra-rich - the Nikkei has been booming - or bubbling.

Meanwhile, Japan has hit the panic button with President Abe directing his cabinet to formulate policies such as printing up "gift certificates" for the poor to "support personal consumption directly."

Against this backdrop Yves Mersch, from the ECB's executive board, made an astounding observation regarding Abenomics:

"I’m not so sure it has worked, considering that this morning we saw that Japan has officially slid into recession again."

In a speech in Frankfurt, Mr. Mersch made a suggestion which may be seen as an acceptable compromise by Germany with regard to monetary expansion to stoke inflation. 

He said "Theoretically the ECB could purchase other assets such as gold, shares, ETFs to fulfill its promise of adopting further unconventional measures to counter a longer period of low inflation."

Germany have been resolutely opposed to monetary expansion through the purchase of debt, but asset backed money printing may be regarded as more palatable.

The suggestion that gold would be used, even in a limited way, to back the Euro is encouraging. Western central banks public utterance regarding gold is usually negative. 

Physical gold supply remains extremely tight. Gold is currently in backwardation meaning that the price on the futures market is lower than the spot price today. 

If holders of physical gold bullion sold it today they could profit by buying a forward contract which would guarantee them the same volume of gold but at a lower price in the future, avoiding storage costs in the interim period and using the proceeds of the sale to invest until that later date. 

Investors are not taking advantage of this opportunity probably because some are concerned that there will not be physical gold available at the lower price which may cause the counterparty to the trade to default.

It appears as though the trepidation of gold investors may sometime come to an end. That the ECB would even consider buying gold in QE may come to be seen as an important moment. 

If the Swiss people vote to pass the gold initiative at the end of this month it is likely that the ECB will feel pressure to enter the market sooner than they may have expected. 

As the currency wars continue it may be that other western central banks will feel compelled to enter the gold market to protect their currencies from speculative attack and devaluation. 

We advise owners of gold to ensure they own gold in allocated and segregated accounts and to sit tight - their patience will again be rewarded.

Get Breaking News and Updates on the Gold Market Here

MARKET UPDATE
Today’s AM fix was USD 1,202.00, EUR 959.68 and GBP 767.81 per ounce.
Yesterday’s AM fix was USD 1,187.00, EUR 950.36 and GBP 759.49 per ounce.

Gold fell $14.30 or 0.36% to $1,186.40/oz yesterday. Silver slipped $0.14 or 0.86% to $16.16/oz.

Gold in EUR - YTD, 2014  (Thomson Reuters) 

Today, gold jumped to a two week high at $1,202 per ounce as a weakening dollar and concerns about the global economy led to safe haven demand. Silver climbed 1.2% to $16.34 an ounce.
Gold climbed as markets digested the important news that the European Central Bank may purchase assets including gold bullion to counter low inflation.

ECB President Mario Draghi said yesterday that unconventional measures may include the purchase of a variety of assets to stimulate the economy. The central bank could theoretically buy sovereign debt, gold, exchange-traded funds, and even real estate to counter a longer period of low inflation, Executive Board member Yves Mersch said yesterday (see above).

Gold in USD - January 1986 to November 19, 2014  (Thomson Reuters) 

The largest gold backed ETF, SPDR Gold Trust, saw holdings rise 0.33% to 723.01 tonnes on Monday, the first increase since November 3. The fund’s 10th anniversary is tomorrow and its holdings are at a 6 year low as ‘weak hand’ investors sell and gold flows East. 

India's central bank is rumoured to announce new restrictions on gold imports tomorrow, a finance ministry source noted to the media.
In the world’s largest consumer China, local prices remain at a premium of $2-$3 an ounce, as buying increased on firmer prices. 

S&P 500 – Jan, 1986 to November 19, 2014 (Thomson Reuters) 

Stock markets continue their constant march higher. The Stoxx Europe 600 was up 0.6% after Germany’s ZEW institute stated that although the economic environment remains fragile, the recent eurozone growth figures suggest a degree of stabilization. 

U.S. stocks eked out slight gains, with the S&P 500 recording a 42nd record close of the year, as comments by European Central Bank President Mario Draghi helped offset data that unexpectedly showed Japan's economy in a recession.

This update can be found on the GoldCore blog here.

Yours sincerely,
Mark O'Byrne
Exective Director

IRL
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E info@goldcore.com

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