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Why globally coordinated QE and higher gold prices are unavoidable
This article is part of the series “Question for the Expert” on GoldSilverWorlds. We have the honour today to get the view of Grant Williams, author of the respected newsletter Things That Make You Go Hmm.
Question: You described in a recent newsletter article, that the next round of Quantitative Easing will be massive and that it will be globally coordinated. Why are you so convinced? What to expect from the gold price in the light of all of this?
Answer from Grant Williams: We have reached the point now where the Europeans (in particular Mario Draghi, head of the ECB) have realized that the only solution to the problem facing Europe, is to print a lot more money. They simply cannot solve this debt problem. They have been trying to treat a solvency problem like if it was a liquidity problem. That’s not going to work.
You only have a couple of options when you have so much debt:
- Either you default …
- Or you pay it back …
- But you can inflate it away as well.
The easiest solution, with the least amount of political pain in the short term for the politicians, is to inflate the debt away. That’s undoubtedly what they are planning to do.
And it’s not just Europe. The US has a significant debt problem and the UK as well. China is planning to print money to stimulate their domestic economy.
We have a situation now where the interests of all the big Central Banks in the world are very much aligned to try and print an awful lot of money. That way, they try to cover their debt problems or stimulate their economy.
Now QE will be globally coordinated. The point in all of this, is that all these countries need a weaker currency: they all try to debase their currency in order to inflate their debt away. Of course, if one country does it in a vacuum, then it works very well for them. But if all the other countries are doing it at the same time, then it’s a very difficult thing to pull off. So they are all going to push on the monetary pedal a lot harder to try and get ahead of the rest of the world.
We have never seen a situation before where all the Central Banks want to debase their currency at the same time. So that means an awful lot of money printing globally in the years ahead.
What all the above means for gold? Well, we have seen a higher gold price already. It’s broken out now after the correction of 8 months. It formed a nice base on the charts. Now it’s starting to breakout after the actions from Mr Draghi and the hints from Mr Bernanke over the past week that we are going to see additional QE very soon. It was only two weeks ago when we were talking about the gold price holding the $ 1,620 level. After two press conferences in one week, we are in a meaningful breakout now. The next technical level on the chart is $ 1,800. If we can clear that, we’ll make a run to the all-time highs of $ 1,920. I think we’ll see $ 2,000 before the end of this year.
Question: Dollar gold is below its all-time highs while euro gold and rupee gold are breaking their all-time highs. What does it mean?
Answer from Grant Williams: That’s a sign of relative strength of the US dollar. We’ve seen people move into the dollar because of the weakness of the Eurozone. Gold is the currency at the center of all this. The fact that euro gold or rupee gold are making all-time highs and dollar gold not, shows the weakness of those currencies rather than particular strength in gold. Gold is really the anchor of the financial system and everything else is valued off it.
Question: Is there an additional insight regarding gold that you would like to share?
Answer from Grant Williams: The current gold price breakout looks like it has some legs at the moment. If we get QE3 during the Fed meeting next week, I expect gold to make a further run. But when you look at the gold mining stocks, you will see that they are incredibly and historically cheap right now. They have been sold aggressively. When you measure the price of the gold miners in ounces of gold, they have values that we haven’t ever seen before. So here you have some fantastic gold companies that are paying decent dividends. We got proof of more careful CAPEX expenditures in the gold mining sector in the last couple of months. So if these companies can prove that they are better custodians of shareholder capital , then relative to the bullion itself, the mining stocks will outperform significantly.
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2012-09-10 15:31:46
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