Lesson 2:

Evolution of Monetary Policy

Lesson 2:

Evolution of Monetary Policy

Monetary policy used to be a fairly conservative affair, and quite frankly a slightly underwhelming topic. In the past few decades, the main goal for most policymakers was to ensure a small increase of inflation every year, also known as price stability.

The main utilised tool of monetary policy was control of the money supply. Primarily this was done by adjusting interest rates, otherwise known as the cost of borrowing. In times of economic downturn rates would be set lower to encourage borrowing, in turn stimulating spending and investment. This would also be set to prevent deflation and get inflation back on target.

In times of economic expansion, rates would be increased in an attempt to stop the economy from overheating, to prevent reckless borrowing and thus encourage saving and to get inflation lower.

However, in the past two decades, especially the last , central banks have come up with a myriad of new tools, policies and programmes designed to primarily ensure inflation remains positive but also help debt-fuelled economies maintain solvency and liquidity. The pace and scale of these programmes have been exceptionally controversial, and their efficacy questioned.

This lesson aims to familiarise you with some of the alphabet soup of acronyms that appear more and more in the media and that have a significant influence on the gold price. The below are all still considered “unconventional monetary policy” and all meant to be stimulative for economies. They are designed to make investors take more risk, for businesses to invest and for consumers to borrow and spend more.

QE & APPs

Quantitative Easing (QE) is a form of a central bank-led Asset Purchase Programme (APP). QE first came to real prominence in during the 2008/2009 financial crisis as a means to get the economy started again in the United States. Since then, many other central banks have embarked on their own programmes of QE.

QE is a policy where the central bank buys government (usually) bonds in the market. The large-scale purchases of governments has a number of consequences. First of all, the bonds are taken out of the market and replaced with cash, which can then be used to purchase riskier assets. Second, by buying bonds the central bank pushes the price of the bonds up, making them less attractive to investors. This is because as bond prices go up the yield (or interest) goes down meaning investors get a smaller return than previously. Additionally, this lower interest rate helps governments, corporates and even individuals refinance their existing debt and more attractive, cheaper rates.

As the cash from QE flows into the market and into riskier assets such as stocks and real estate, their price rises. This is intended to create a wealth effect where everyone who owns the assets feels wealthier and it is then hoped that in turn spending and investing rise.

The European Central Bank for example has bought almost EUR3 Trillion of assets, and not just government bonds, in the last few years to stimulate the economy. So far, the jury is out as to how effective this has been. However, the policy does not look like changing any time soon.

app cumulative net purchases by country

Negative Rates

Negative interest rates are another controversial measure which some countries’ central banks have used. The idea behind negative rates is to discourage saving which is deemed not useful for economic growth. Instead by charging banks and in some cases citizens interest on their deposits it is intended that the cash is moved out of the account and into riskier assets such as real estate or stocks, or is spent within the economy.

Again, the full consequences of negative rates are not yet fully understood. In the Eurozone banks’ profits have been hit hard as their margins on their loan businesses have decreased. On a more philosophical view, some question the idea of punishing savers who have prudently saved their money for a rainy day or house deposit and forcing them into assets that are not in line with their own financial objectives.

Yield Curve Control

YCC or yield curve control is the policy potentially next in line to be implemented in the West. Used by the United States in WWII and by Japan from late 2016 YCC it aims to peg or cap the long-term borrowing rate of a nation at a certain level in order help reduce debt costs. Whenever the yield of the long-term bond rises above a certain level the central bank buys a sufficient quantity to drive the price up thus decreasing the yield back under the desired target. For savers and big investors in government bonds such as pensions funds, this poses big problems. Like other forms of forced decreases in interest rates, it could also encourage reckless borrowing further increasing future insolvencies, defaults or even a financial crisis.

The Effect on Gold

Whatever policy is used to increase the money supply or force savers away from cash gold is usually a beneficiary. This is because gold is seen as the ultimate store of wealth and is considered a safe haven asset. New and aggressive policies do little to give people faith in the economy. History is littered with similar actions by governments or empires trying to devalue their currencies by increasing the money supply. Some view this as the “debasement” of the currency.

With so many countries now involved in these policies, there is the sense that this really is a race to the bottom. Japan, as the leader in the field, has struggled to create a return to normal economic growth or to create inflation. Yet, the policy consensus remains committed to these policies. As the value of cash continues to go down relatively, holding it is penalised, gold stands to continue to benefit.

Advanced

Lesson 1:
Lesson 1:
Gold As An Investment
Discover the unique characteristics that differentiate Gold from other commodities and has outperformed not only broad-based indices but most individual commodities too.
Lesson 1: #Advanced (5 min read)
Lesson 2:
Lesson 2:
Evolution of Monetary Policy
Monetary policy used to be a fairly conservative affair, and quite frankly a slightly underwhelming topic. In the past few decades, the main goal for most policymakers was to ensure a small increase of inflation every year, also known as price stability.
Lesson 2: #Advanced (4 min read)
Lesson 3:
Lesson 3:
News and Numbers for Gold Traders
When considering your next gold investment, there’s another significant factor to be aware of: news as a price driver. Here are the most important events any gold investor should be aware of: news as a price driver.
Lesson 3: #Advanced (3 min read)
Lesson 4:
Lesson 4:
Future Trends: How the Gold Market Could Evolve
With advancements in technology and the emergence of gold-backed products like ETFs or cryptocurrencies, the landscape for the gold market – especially as a finite resource with depletion of natural reserves – has the potential to change and shift over the next ten, twenty, or even thirty years. But what factors should be considered when thinking about how the gold market could evolve?
Lesson 4: #Advanced (3 min read)
Lesson 5:
Lesson 5:
Potential Political Catalysts for Gold to the Upside
No one can predict the future. That is especially true in financial markets and politics. However, certainty sells and there are plenty of people who sell predictions that are far too confident. When it comes to price targets for financial assets it is prudent to assess their credibility and track record.
Lesson 5: #Advanced (4 min read)
Lesson 6:
Lesson 6:
Precious Metals
We all know that gold is the most famous of the precious metals, but here we're examining the others in detail can help us understand why gold remains the most popular of this group.
Lesson 6: #Advanced (3 min read)
Lesson 7:
Lesson 7:
Gold and Space
Most current estimates claim that the amount of available Gold on Earth is somewhere between 150,000 – 250,000 tonnes. And at current rates of production, it will be a few decades or a century before this supply is extinguished. But once it has, where then? 
Lesson 7: #Advanced (4 min read)
Lesson 8:
Lesson 8:
Gold and Fiscal Policy
There is always a lot of hoo-hah about Gold and Monetary Policy, but rarely about Gold and Fiscal Policy. However, a Government’s fiscal policy plays an important role in the price and movement of gold. This lesson explains how. 
Lesson 8: #Advanced (4 min read)
Lesson 9:
Lesson 9:
Junior Gold Miners
Structured products, ETFs, ETNs and mining companies all give investors exposure to gold price movements, among other things. This lesson focuses on the small mining companies, commonly known as junior gold mining companies. 
Lesson 9: #Advanced (4 min read)
Lesson 10:
Lesson 10:
What is Universal Basic Income?
Like so many of these abstract economic terms Universal Basic Income (UBI) has a number of definitions and variants. This lesson will take you through these different ideas, continuing to a summary of both sides of this controversial policy. We will then look at what the implications could be in financial markets.
Lesson 10: #Advanced (4 min read)