Did the BOE Just Confirm the Long-Term Picture for Precious Metals?
Source: Eric McWhinnie, Wall St. Cheat Sheet (10/21/11)
"Although precious metals look poised for more long-term gains, the short-term picture is cloudy."
In March 2009, the Monetary Policy Committee announced that it would start to inject money directly into the economy, in addition to setting interest rates at 0.5%. The move was made to stimulate the faltering economy and meet 2% inflation targets. The BOE bought £200 billion of assets (mostly government bonds) between March 2009 and February 2010. Now, the BOE will launch another round of quantitative easing worth £75 billion. After discussing earlier this month to inject between £50 billion and £100 billion, the Monetary Policy Committee voted 9-0 for more QE. In September, only one MPC member desired more QE, but now, all 9 members are in favor of more QE after citing a dramatic deterioration in the international outlook as a key factor.
The move to unleash more QE into the economy is another example that central banks are willing to print more money in order to temporarily prop up the economy. Investors take refuge in gold and silver because this money printing devalues fiat currencies. All members of the Monetary Policy Committee also agreed to keep interest rates unchanged at their record low of 0.5%, even though consumer price inflation rose to 5.2% last month. Ben Bernanke is also committed to record low interest rates until at least 2013. Record low interest rates drive gold and silver prices higher because savers and bond investors are punished through negative real interest rates. By the time inflation is factored in, the real return in bonds and saving accounts are pathetic. Investors looking for a store of wealth often find that gold and silver offer a better solution than bonds or saving accounts.
Although precious metals look poised for more long-term gains, the short-term picture is cloudy. Despite being a safe-haven, gold and silver have been trading along side of equities. When Ben Bernanke disappointed with Operation Twist last month, the markets sold off, including gold and silver. Gold fell from $1900 to $1,535, while silver fell from $40 to $26 when investors did not receive enough stimulus news from the Federal Reserve. A similar situation is taking place across the pond.
Although the BOE announced more QE, many explained it was not enough. Simon Hays from Barclays Capital says, "Our calculations suggest that £75 billion is likely to be insufficient to fill the demand gap that has emerged over recent months, but the lack of experience with this policy makes any attempt at calibration highly speculative." Jonathan Loynes from Capital Economics explains, "the minutes suggest that the MPC thinks that the new round of QE will have similar effects to the last one, which is not particularly encouraging given the continued weakness of both bank lending and economic activity. Given this, we continue to expect at least another £75 billion extension of the program in February, and perhaps considerably more thereafter." Hopes are also running high that the leaders of Germany and France can work together to put a comprehensive solution in place to solve the euro debt mess in the next few days. If this plan does not satisfy the markets, gold and silver could see even more short-term weakness.