Bank of Japan Goes All In
On Friday of last week Japan shocked the markets by announcing a new round of stimulus to revive its slowing economy. Equity markets in both Europe and the US cheered the easy money policy as US stocks hit another all time high.
According to an article in Bloomberg, the Bank of Japan will be increasing its purchases of Government bonds to a record annual pace of $709 Billion.The article speculates that this is “the most obvious bond bubble in modern history”.
The author goes on to say that “Once the laws of finance, and gravity, reassert themselves, Japan's debt market could crash in ways that make the 2008 collapse of Lehman Brothers look like a warm-up”. (Source Bloomberg 11/4/14)
Yet, despite the risk of implosion to the Japanese and global economies investors welcomed the news as an opportunity to load up on risk assets. Investors are being conditioned that Central Banks will have their backs should another crisis develop.
Currency and Bond Markets are Completely Unpredictable
One of the effects of the unprecedented action by the Bank of Japan was a surge in the US Dollar following the announcement. In an article in Reuters the Dollar hit 114 Yen on Monday which is its strongest point in nearly 7 years. (Source Reuters 11/3/14)
The Bank of Japan is desperately trying to weaken the Yen and produce inflation. The surprise stimulus caused traders and investors to immediately sell the Yen and buy the Dollar. So now the attention is going to shift to the Euro this week as the ECB decides whether it will provide any additional support to the EuroZone economy.
For really the first time since the financial crisis in 2008 we are seeing a divergence in the policies of the major Central Banks. The Fed announced it has completed its bond buying program; the Bank of Japan is expanding its program; and the European Central Bank is caught in a political battle with Germany to provide more stimulus.
The result of all of the this is more historic moves in the currency and bond markets in the future.
How Will All of This Impact Gold
One of the reasons for the collapse in the Gold price on Thursday and Friday last week was the surge in the US Dollar. It is highly likely that the strength in the Dollar will be short lived. However, it is a reminder to Gold investors that the moves in most financial assets will be dramatic because of the shifting policies of the Central Banks.
But, despite the big price swings it feels good to own an asset that has real value in a house of cards financial system built by Central Banks.
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