by Michael J. Kosares
From this morning’s Financial Times:
“It is quite easy for one to introduce QE policy, as it is little more than printing money. When QE is in place, there may be all sorts of players managing to stay afloat in this big ocean. Yet it is difficult to predict now what may come out of it when QE is withdrawn.” – Li Keqiang, China’s premier
Sticking with the oceanic theme, here is a similar sentiment from Warren Buffet:
“Only when the tide goes out do you discover who’s been swimming naked.”
And another sea-faring allusion from the International Monetary Fund (also recorded in today’s Financial Times):
“The Federal Reserve’s first interest rate hike risks triggering a jolt to bond markets that could surpass the turmoil the central bank inadvertently set off in 2013, the International Monetary Fund has said. José Viñals, the director of the IMF’s monetary and capital markets department, warned of a ‘super taper tantrum’ and spiking yields as the US central bank gets nearer to lifting rates from near-zero levels. ‘This is going to take place in uncharted territory,’ he told the Financial Times in an interview.”
Then we have warnings from a couple of well-known commentators on the potential for a liquidity crisis in the bond market.
Jamie Dimon (JPMorgan CEO):
“The banking system is far safer than it has been in the past, but we need to be mindful of the consequences of the myriad new regulations and current monetary policy on the money markets and liquidity in the marketplace—particularly if we enter a highly stressed environment.”
Larry Summers (former Secretary of the Treasury):
“I thought regulatory authorities made a mistake when they looked at each institution, and said, ‘You’ll be safer if you withdraw from the markets a bit,’ and then forget that if all institutions withdraw from the markets a bit, the markets would be less liquid. The markets themselves would be less safe. That would, in the end, hurt all institutions. I think there is a real issue there. Frankly, a lot of the effort that’s going into macro prudential should be into making sure we have liquidity.”
There have been a number of other prominent figures registering similar sentiments in the public venue. Stanley Fischer, though, the Fed’s vice chairman, is seen swimming against the tide:
“Markets can’t depend on the Fed staying on hold forever, says Fed Vice-Chair Stanley Fischer, speaking at an economic forum. Yes, the first quarter was a weak one for the U.S. economy, he says, but a rebound in Q2 is already underway.” [Seeking Alpha, 4/16/2015]
So, you might ask, what does all of this have to do with the demand for gold in international markets?
I will take you back to the quote at the top from Li Keqiang about printing money. The financial markets are between a rock and a hard spot. Print with abandon and eventually runaway inflation is inevitable. Stop the printing presses and the markets and the economy are pulled into a vortex of illiquidity (which translates to a downward stock and bond price spiral and all it portends for financial institutions). In either eventuality, gold is the one asset that stands apart from the potential maelstrom of counterparty risk and/or runaway inflation – an ark of sorts, a weighty portfolio anchor and an asset in which China, and anyone concerned about contemporary monetary policy, takes an abiding interest.
As for Mr. Fischer, one wonders how fifteen days into the second quarter he might be so certain of its outcome. Such boldness might raise an eyebrow or two among Wall Street’s more seasoned travelers . . . .
One last watery reference – a note in cuneiform recorded on an ancient tablet dug up somewhere in Mesopotamia:
We could have sworn you said the ark wasn’t leaving till 5.
Talk about missing the boat. . . . . . .MK
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A little USAGOLD history. . . . Pictured are News & Views hard copies from 1999 just before gold began its secular bull market. News & Views was Review & Outlook’s popular predecessor at a time when gold-based publications were few and far between. The “Big Breakout” headlined in the November, 1999 issue refers to a price jump from $260 to $330 per ounce. Your editor sees a good many similarities between that period and now.