SheldonThinks, Sydney Australia -
There was an important development for gold pundits this week. The British Treasury on the advice of the Chancellor of the Exchequer is to engage in quantitative easing or 'printing money'. Resorting to printing money to finance government expenditure has not been used for decades because of its unsavioury association with inflation. Printing money directly links the government to inflation. The justification for this is of course the fact that the banks cannot lend funds because of their parlous condition, plus the fact that asset prices are still falling. The proceeds will be used to buy company IOUs and other assets held by banks. This will boost the reserves of the banks, and thus allow them to make new loans, which will support asset prices in the economy. But I would suggest not until asset prices find a base. The rationalisation for the move is the threat of deflation. The reality is that they will not stop deflation, but it will eventually cause inflation when asset prices bottom of their own accord. The interest rate is already 1%; but new bank lending capacity is unlikely to finance much except new gold mines given that gold prices are taking off.
The question is - when will other government treasuries show their folly by printing money as well. The reality is that the treasury of many governments has been so decimated by their prior loose monetary policy, that they can no longer debt finance, and they will be forced to print money. Asian and Middle Eastern treasuries might be questioning their prior support for the USD. No doubt they will be buying gold. I would suggest as modest wealth holders - buy gold stocks for better leverage to this emerging speculative boom.
The price of gold has been moving up $US15/oz a day of late, and is close to $US1,000/oz. We are tipping $US2,000/oz by the end of the year. Gold tends to create its own momentum in such times.
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