Forget the UK. In the story of global monetary policy, this little land shows up on the radar as a fairly small blip. But there are signs that the big powers, the ones whose echo reverberates around the economic system in an almost deafening cadence, are set to rein back. Gold has fallen sharply on the news. Is it time for investors to rethink?
As I write these words, gold is trading at $1,586 a troy ounce, the lowest level since summer last year. The yellow metal is still very expensive compared to a few years ago, but right now predictions that gold would pass through the $2,000 barrier don’t look very clever. Who knows what the future will bring, and that last sentence may itself look a bit daft in a few years’ time, but it does seem there is both a rhyme and a reason for gold’s fall.
Firstly, there are currency wars, or rather lack of them. Gold bulls have been predicting a kind of race to the bottom, as countries around the world try to outdo each other with currency devaluations. As you know, fears of this pretty much dominated talks at recent meetings of the G7 and G20. The two nations that are most vocal on the dangers of currency wars, and indeed the two big critics of QE, are Russia and Brazil. But their critique is odd. The purpose of QE is to push up demand and asset prices. A commodity producer such as Russia should therefore be a big beneficiary of QE.
As for Brazil, (remember it was there that a finance minister first warned of currency wars) hints have been coming forth from its central bank that a higher currency is being tolerated because it is helping to keep inflation in check.
Brazil’s problem, incidentally, may not be dissimilar to the one that haunted the UK in the past. In the UK, North Sea oil and a buoyant City had the effect of pushing up sterling, making it harder for manufacturers to compete overseas. For Brazil, rising commodity prices have helped to lift the Brazilian real, so that just like the UK, manufacturers have lost competitiveness. Actually, come to think of it, you may make a similar argument about Russia.
Now let’s turn to Japan. We keep hearing about how the newish Prime Minister Shinzo Abe wants the central bank to turn on the QE taps. But so far the reality has fallen way behind expectations. Remember, Mr Abe has been Prime Minster before. He was not an out an out monetary policy dove then. Japan is a conservative country. What for Japan might seem like radical policy might seem quite restrained for the rest of the world. Amongst others, Capital Economics is very cynical about talk of QE leading to further sharp falls in the yen, and has predicted the currency will rise quite sharply later this year. We all know that the markets tend to overreact. This time they may well have overreacted in the form of pretty naive expectations of aggressive monetary policy in Japan.
Now let’s take a look at the two countries that really matter. The latest minutes from the Fed suggest members of its FOMC (that its equivalent of the MPC) are turning against QE.
It was covered yesterday in Bull and Bear. See: The US signals end of QE as Bank of England moves towards more
QE in the US of A may not be completely over, but the signs are clear. It is drawing to a close. It is interesting to note, however, that US inflation was just 1.6 per cent year on year in January. In the US, critics of QE have been warning about the dangers of runaway inflation. Such dangers are not showing up in the data.
Finally, there is China. According to Capital Economics, the People’s Bank of China has been draining an “unprecedented amount of liquidity from China’s banking system.” Part of this policy is just a one off reaction to the New Year festivities. But it seems the extent of the monetary tightening is such that it shows that China’s central bank has bigger plans. Chinese papers have been saying that the regulators are putting pressure on banks to lend less. Mark Williams, Chief Asia Economist at Capital Economics, said: “We think…that policymakers are worrying more now about the risks associated with rapid credit growth than they are with an economic hard landing.”
Things change. What is true now may not be true in a few months’ time. But right now, the runes point to less QE than the markets had anticipated.
PS. Here is a question for you. The term Troy ounce comes from the French town of Troys. I am sure you pronounce the word the same as you would the city of Troy – the one that fell to a big wooden horse. Everyone I know pronounces it that way. But this is what puzzles me. I passed through the French town that gave its name to the way we measure gold a few years ago. And I found out that you pronounce the name Troys quite differently. It’s more a kind ‘trowa’, sound. So why not pronounce Troy ounces that way?
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