Precious metal will rise again
U.S. Fed, Japan caused the crash
LONDON — Commodity prices have been falling since September, culminating in a rout over the last two weeks. That is a classic warning for the global economy.
It is becoming ever clearer that the roaring boom in global equities since last summer has priced in an economic recovery that does not, in fact, exist. The International Monetary Fund has had to nurse down its global growth forecasts yet again. We are still stuck in an old-fashioned trade depression.
German car sales fell 17 per cent in March. That should puncture illusions that Germany is about to pull Europe out of self-inflicted slump.
You have to be careful reading too much into commodities, distorted by China. The time-honoured cycle is a surge of investment that comes on stream at once with a lag. America’s shale drive has turned the world gas market upside down. Copper output in Chile rose seven per cent last year. The crash in the Baltic Dry Index for shipping rates is partly a tale of too many ships.
Yet excess supply does not explain the collapse in gold over the last week. Cyprus may have been an incidental trigger. If the EU-IMF Troika is determined to strong-arm the Cypriots into selling most of their pint-sized holding of 14 tonnes, it may do the same to Portugal when the time comes, and then you are talking about the world’s 14th biggest holding of 382 tonnes.
My view is that the U.S. Federal Reserve and the Bank of Japan “caused” the gold crash. The rest is noise. The Fed assault began in February when it warned that the longer quantitative easing continues, the harder it will be for the bank to extricate itself.
It said the Fed’s capital base could be wiped out “several times” once borrowing costs climb. The window will start shutting by 2014, with trouble then compounding at a “dramatic” pace. This was a shock. It suggested that the Fed has lost its nerve, and will think long and hard before launching a fresh blitz of money.
Japan’s “Abenomics” will prove a net drag on the world over coming months. It is exporting deflation through trade effects. This is already visible in Korea and China, where soaring wages have eroded competitiveness.
The world is still in a contained depression. Sliding commodities tell us global money is, if anything, too tight. “There is a threat of deflation almost everywhere. A lot of central banks will have to follow the Bank of Japan, whatever they say now,” said Lars Christensen from Danske Bank
The era of money printing is young yet. Gold will have its day again.