“The central banks of the West appear increasingly desperate to avert a financial crisis, and the discoveries that proceed from market breaks such as this.”
UBS’s rogue trader provides an appetiser as far as such unpleasant “discoveries” are concerned. As Warren Buffett famously remarked: “it’s only when the tide goes out that you learn who’s been swimming naked.”
The desperation of monetary authorities is evident by the decision by the Federal Reserve, European Central Bank, Bank of Japan, Bank of England and the Swiss National Bank will provide banks with dollars in three medium-term loan operations though to the end of the year. Stock markets – and in particular, financial stocks – reacted bullishly, with all major global indices settling up for the day.
In contrast – and to the probable delight of the Federal Reserve – the US dollar sold off, with the Dollar Index (USDX) settling at 76.24 – down 0.77% intraday. More bad news from Europe (which seems inevitable) will likely push this index higher, but this is of course merely a measure of the dollar’s relative strength against another troubled fiat currency. Given that the euro crisis is likely to prompt serious money printing by the ECB within the next few months (likely soon after Italian Mario Draghi takes over as ECB president on November 1).
Combined with festival season in India – a key reason why Q1 and Q4 are usually the strongest periods for the gold price, as outlined by gold analyst John Brimelow in this interview with James Turk – and a break through $2,000 per ounce by the end of the year is highly likely. The present correction in gold and silver prices will prove short-lived.
Rising inflation around the world is offering a further incentive for people to buy gold. Tuesday’s news that CPI inflation in the UK is now at 4.8% was followed with the news yesterday that the US Consumer Price Index now stands at 3.8% – a 0.4% rise from the previous month. As economist John Williams comments at shadowstats.com (subscription required):
“August CPI reporting reflected an ongoing spread of inflationary pressures well beyond the energy and food sectors, with the annual “core” inflation rate picking up at an accelerating pace, nearing 2.0%... This circumstance has to be distressing to Fed Chairman Ben Bernanke, who has taken official refuge in the “core” inflation concept, ignoring food and energy inflation. Keep in mind that rising “core” inflation still reflects upside pricing pressures from the spreading effects of higher oil prices (driven by the Fed’s dollar-debasement policies), not from economic demand. The Fed’s primary function remains keeping the banking system solvent. Containing inflation and boosting economic activity are secondary goals.”
Put in stronger terms, preserving the existing banking system means trashing the dollar. You’ve all been warned.