A few months ago, there were a number of articles from prominent commentators that argued that the era of expansionary central bank policy was drawing to a close. The last few weeks, however, have shown that this was indeed an exceptionally premature assertion. Any bad news, whether it be economically related or not, is now an excuse to open up the floodgates and support financial markets.
The idea that central banks concentrate solely on controlling inflation and creating price stability is now consigned to the history books, and thus, it is clear and understandable why stocks and gold continue to make new highs. Economic news around the world continues to trend negatively while the uncertainty and disruption from the virus outbreak in China gives central bankers all the reasons they need to reassure markets. Whether these policy actions are effective is the real question..
As Dario Perkins writes in the his FT opinion piece: “The idea that central banks can address any problem that emerges in markets is surely one of the most dangerous in finance. Since the outbreak of the coronavirus in China, it is reaching the point of parody.”
Indeed, the new head of the ECB stated that fighting climate change would be one of the central bank’s main goals. Perhaps however they should focus on the real effects of their current policies. The takeover of Tiffany by LVMH is a case in point. The fact this doesn’t seem to make real headlines demonstrates how quickly something abnormal can become quickly normal. This really isn’t capitalism anymore. The fact that the ECB is essentially financing a corporate takeover should be ringing alarm bells, but only a handful of European politicians have asked any questions about it.
So far, the United States has resisted the policies of Europe and Japan and maintained positive interest rates as well as having a far more conservative policy towards asset purchases. Even there, the home of global capitalism, voices are beginning to suggest that a European or Japanese type policy could be the right course of action in the event of an economic downturn. But the evidence is mixed on how effective such action is.
Japan, which has been experimenting with various forms of central bank intervention for over 20 years really does not have so much to show for it. Added to that, the economic at numbers out of Japan this week were absolutely shocking. A collapse of over 6% in GDP in the last 3 months of 2019. And this was even before the outbreak of the coronavirus started to affect the global economy.
With multiple companies issuing profit warnings and very few people at work in China, the natural reaction would be for the stock market to go down. This is healthy, this is what markets do. They adjust to new information and revalue assets accordingly, but when there is so much intervention in the stock markets in China this happens:
China has injected significant liquidity into the market, as well as made it known that short-selling or any non-essential sales will be frowned upon. It all leads to an inevitable crash somewhere down the line, or hyperinflation. But the policies are not changing, and there is little understanding within the general public of what is actually going on. That though, may change..
If central banks behaviours become a political issue, then all bets are off. If like the LVMH example, the ECB is funding the debt of Europe’s richest man’s company then eventually this will feed into extremist parties who can tap the successful populist policies of recent times. If the gap, between the haves and the have nots increases, during a recession, then expect populist parties to do very well. And their number one target will be central bankers. For many, the elites are getting out of control..
All of this leads to higher gold prices, as faith in these central banks and responsible and prudent institutions increasingly diminishes..
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Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, this does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.