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Euro and pound plummet, stocks jump on ECB and BoE money printing expectations

Posted on 05 July 2013 with no comments from readers

The euro weakened to $1.28 and the pound to $1.49 after remarks by the governors of the European Central Bank and Bank of England confirming their commitment to a long period of low interest rates which the markets interpreted as meaning more money printing to come. Stocks rose two to three per cent.

Investors ought to spot immediately that what they are gaining in one pocket is being stolen from the second. Devaluation is the oldest trick in the central bank book. What’s a stock that goes up worth if it’s denominated in a falling currency?

Inflation and devaluation

It is, however, always inflationary. More of the devalued currency is needed to purchase the same amount of imported goods. Inflation usually causes further inflation.

If workers, for instance, find their basic living costs rising then they will ask for higher salaries. In a competitive economy it may be hard to say no if that means losing them to a rival who will pay more.

That’s what is happening in the UAE right now where a surge in real estate prices and rents has pushed salary increases to a four-year high.

But the real problem with QE or money printing by the central banks is that abandoning this policy becomes harder and harder to achieve as it takes off. That’s what we are seeing this week. Portuguese bonds have spiked in price and the ECB has to respond.

There will come a point at which money printing fails. It always does. Then interest rates will swing back in the other direction and inflated stock and house prices will come crashing down.

It’s a dangerous dilemma for investors: trapped if you invest, damned if you don’t. However, if history is any guide then gold and silver are the asset classes that eventually come out on top. The money that nobody can print.

Gold price

At the moment gold and silver are deeply out of favor because the central banks deliberately smashed the gold price when the Bank of Japan launched its massive money printing program in April. Such manipulation gives investors the perfect opportunity to buy gold but those who invest on momentum only are easily fooled by falling prices.

Anybody stocking up on gold and silver this summer instead of chasing stock prices higher is going to make a fortune in the near future, and many others betting in the opposite direction are going to lose one.

History is not on the side of the money printers.

Posted on 05 July 2013 Categories: Banking & Finance, Bond Markets, Global Economics, Gold & Silver, Hedge Funds, Investment Gurus, US Dollar, US Stocks

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