Gold Rush Before ECB AnnouncementFebruary 15, 2016 1:58 pm
Gold Rush Before ECB Announcement
Last week was the first time in a year that I didn’t write an article. No I wasn’t being indeterminably lazy and nor was I blissfully on holiday. It was due to the fact we had the busiest week we’ve had since early-mid 2012. So much so the Telegraph contacted us after we had queues to buy gold. It was unbelievably hectic here at West End office and there was no time for me to pore over writing a gold analytical discursion.
So what happened last week? What made us have a Gold rush?
The last few weeks including most of January, the market has been gaining momentum. Equities, as I mentioned in an article some time ago, has felt the effects of an interest rates rise. The over-inflated confidence in the market has come off and so has the shine. Fleeing investors from the equities markets have flocked to gold. As I have stated previously, gold some time ago was due its correction but in the current conditions, despite the strength of the dollar, gold has risen. It pays little to no attention to the dollar and surveys the economic scene far more broadly than other asset classes. As market confidence wanes in the stock markets and other markets such as property begin to slowdown, the feeling that the nose of the plane is no longer in the ascendancy begins to take hold. Investors are beginning to worry about the markets and that the cycle for recession is only just beginning.
It is hardly surprising. We don’t run before we walk, yet the the unbridled confidence in the markets has been encouraged on the promise of an interest rates rise and everything is on the up. The US has increased the Reserve’s interest rate, raising the interest payments it receives from credit it has lent. Which is all well and good but this is a stark contrast to other Central Banks. In January, the Bank of Japan (BoJ) announced the decision to cut interest rates to -0.1%, effectively charging the banks for holding deposits overnight. The reason given by the BoJ echoed ECB’s Mario Draghi in 2012 by stating the bank will do whatever it takes: “What’s important is to show people that the BoJ is strongly committed to achieving 2 percent inflation and that it will do whatever it takes to achieve it,” – BOJ Governor Haruhiko Kuroda.
The Bank of Sweden likewise has followed the trend and cut its interest rate to -0.5%. The global currency war is continuing. On the one side you have the US, determined to race ahead trying to sure it’s economy up with a strong currency. On the other side you have Japan, Sweden, Switzerland and the ECB racing to devalue, trying to beat their neighbour to it.
Later today we have the ECB announcement from Mario Draghi as questions are being asked whether he is up to the task of “whatever it takes” that he outlined in 2012. Germany in particular are shouting the loudest. The ECB have missed target after target and now the voices of discontent are less than muted. The ECB have already stated further quantitative easing could be invoked, adding to the snow-balling of currency devaluation.
Amongst the currency skirmish, you have the Chinese. They already devalued their Yuan in attempt manage their economy. Likewise, they know they are slowing and they know what it is going to mean for the rest of the world. So what is it they are doing? They in fact are buying gold – they are becoming and increasing buyer in the gold rush. They are buying the one thing that is the only super hedge – the yellow metal. The Chinese added 21 tonnes of gold to their reserves according to the World Gold Council. Furthermore, the Chinese have also bought the lease of a 1,500 tonne gold vault in London from Deutsche Bank in January. A big indicator as to the Chinese trying to strength its Yuan with physical gold.
Verdict:- We felt the effect of the gold in the last couple of weeks. The price has rocketed in January and given how the first part of this year has started, it could well continue. My biggest concerns are things like the BoJ and what the Chinese are doing. Things are not going well at the macro-economic level and if the last week was anything to go by, any more bad data could spark something more aggressively-recession-looking. The gold rush may only just be beginning.
Article by Michael Cooper