OCTOBER 6, 2010.
Gold Goes on a Print Run .
By ROLFE WINKLER
Gold may be a barbarous relic, but in barbarous monetary times, relics do well. Economist Steve Keen's spin on the famous John Maynard Keynes quote nicely encapsulates today's gold trade.
The Bank of Japan's decision to beef up asset purchases, which can now include such rock-solid assets as exchange-traded funds and real-estate investment trusts, has gold bulls salivating over what unconventional weapons the Federal Reserve may deploy to rekindle inflation. At $1,338.90 a troy ounce, the metal has risen 22% this year. The huge force of deleveraging central banks must overcome in their quest to reflate economies has fueled expectations of more spectacular monetary pyrotechnics.
In the U.S., the Fed's conventional method for stoking demand and inflation, lowering rates to encourage more borrowing, is failing because rates near zero can't be pushed lower. So much debt has been taken on relative to income that consumers finally have to pay down debt, or have it written off, before they take on more.
Despite a decline from its peak, combined public and private debt still stands at 344% of gross domestic product, according to Nomura. And this excludes the government's entitlement obligations, which under some estimates more than double that number.
To create inflation against that backdrop looks likely to require far more aggressive stimulus than has been used, say gold bulls. Indeed, they believe the Fed's commitment to drive up inflation eventually may lead to the central bank effectively funding ongoing deficits, or even new government stimulus, by purchasing huge amounts of Treasurys. The Bank of Japan wanted to persuade investors it hasn't crossed that line Tuesday, in part by buying a range of assets rather than just government bonds.
If money printing, or quantitative easing, goes far enough in the U.S. it eventually could stoke serious hard-asset price inflation, even if consumer prices lag behind. It also could undermine the greenback further, in itself pushing up dollar-denominated gold prices.
With further quantitative easing in the developed world looking likely, the appeal of hard, unprintable currencies like gold and other commodities will remain. How far those rally depends on how aggressive the U.S. and others get. The Bank of Japan's pre-emptive move, at $60 billion, was punchy for its range of assets, including REITs and ETFs. But it wasn't huge in the context of Japan's economy, and didn't stem the yen's rise against the dollar.
If the Fed just does enough quantitative easing to keep the U.S. economy muddling through so consumers can slowly work off debt, gold looks like a dangerous bet at these levels. The recent surge already might have priced in something bigger.
The question now for dollar and gold investors is whether the Fed has the collective will to take the nuclear option.
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