First off, the global economy is accelerating to the downside and this is causing central banks to become the most dovish they have ever been in the entire history of fiat currencies. For example, the leader of Japan's LDP party, Shinzo Abe, called for the Bank of Japan (BOJ) to raise its year over year inflation goal to 2-3% and to engage in unlimited money printing until deflation is fully vanquished. He said if elected, he would forge an alliance with the BOJ to launch an all-out war on deflation and to attack the Yen-blaming a strong currency as the primary impediment to Japan's economic recovery. Mr. Abe also called for the BOJ's policy rate to be cut below zero.
Not only are central banks tripping over themselves to destroy their currencies but gold should also be rising due to tensions in the Middle East that are the most explosive in many years. Car bombs are a daily occurrence once again in Iraq and last month alone 150 people were killed and 300 more wounded in the nation, according to the Iraqi Interior Ministry. Israel has now massively escalated its measures to make impotent Hamas, just as it also prepares for the growing likelihood of an all-out war with Iran come this spring. Civil unrest on this global scale is usually bearish for the global economy and quite bullish for the price of oil and gold.
Turning to the all-important U.S. central bank, Fed Chairman Ben Bernanke has all but officially announced that QE IV would be launched in January to combat the crumbling domestic economy. The Fed has communicated that $85 billion of purchases are most likely to occur in MBS and Treasuries each and every month starting in 2013. Bernanke feels compelled to deploy endless money printing because U.S. jobless claims surged 78k to 439k last week, just as the Philly Fed manufacturing survey showed a decline of 10.7% vs. an increase of 5.7% in the month prior. A faltering U.S. economy should be very dollar bearish and cause the yellow metal to move much higher.
All this money printing has already sent the monetary aggregate M2 soaring at a 12% annualized rate. Money supply growth of this nature is like rocket fuel for the price of precious metals.
On top of all this the Shanghai and Shenzhen stock exchanges are about to launch gold ETFs for their investors this December. Providing an easier way for citizens to own gold in China should be massively bullish for the metal.
So what's the problem? There is only one; and it is something that should go away by January, at the very latest. The U.S. is currently going through a perfunctory pretense that we actually care about debt and deficits. In fact, the markets now fear that there is a significant chance that the 2013 fiscal deficit would be slashed by 70-90%. If such an unlikely scenario were to occur, most of the Fed's money printing would lay fallow. That's because for the broader monetary aggregates to increase they need some entity to borrow from banks. Since the private sector has been in a deleveraging mode for years, the only entity that has been borrowing with alacrity has been the Federal Government. If they were to stop borrowing money in a trenchant fashion the economy would temporarily take a nose dive along with most asset prices.
However, both republicans and democrats realize that being blamed for a recession is a fast ticket out of power. Therefore, once again our government will most likely punt on taking any serious measures towards balancing the budget by the end of the year; or at the latest in January of next year (once the Bush-era tax cuts actually do expire, it's easier for congress to just reinstate most of them). After the charade in D.C. ends, look for all those bullish factors behind risk assets to flood the markets at once. And send the stock market higher in nominal terms and the gold market to record nominal highs next year.
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