If you seek an explanation for the Federal Reserve’s orchestration of a bear raid on the gold price then look no further than the Bank of Japan’s monetary blitz. What’s just been announced is quantitative easing on steroids with some $2 trillion of yen to flood global markets.
The anticipation has devalued the yen by 18 per cent in the past six months, the reality will be still more depreciation against the US dollar. The danger that the Fed wanted to avoid with a successful bear raid on the gold price was a rush into gold that would have sent its value soaring and make the dollar look cheap.
In other words, money leaving Japan would suddenly spike the gold price. With gold stuck around $1,550 down more than $50 since the raiders struck this has been a short-term success.
Longer term how can what the Bank of Japan has just done be anything other than gold positive? They can’t create several hundred tonnes of gold bullion and dump that on the market. It’s the monetary base of the world that has again been given a massive boost.
The Fed will have been warned in advance of this action of course and its action in the gold market was the response. This was just the moment to put the wind up gold bugs and destabilize gold.
It was the diversionary attack from the main battle of the week which we now know to be the Bank of Japan’s even bigger than expected QE program. The Japanese monetary base will rocket from 29 to 56 per cent of GDP by the end of 2014. What comes next when the dust has settled?
Higher gold price
Standby for much higher gold prices as the yen ‘carry trade’ is reignited with cheap Japanese money pushing up asset values like gold bullion. George Soros has said he thinks what the BoJ is doing is ‘dangerous’ with a risk that money will flood out of Japan to avoid devaluation.
Where will that money go? Into US stocks and bonds or precious metals? There are more doubts about gold and silver after the bear raid this week but commonsense will soon prevail.
You can’t print precious metals. You can print yen!