The ECB announced a new package of measures to stimulate a supposedly strong economy and boost inflation on Thursday the 12th. At the time of writing, it has just been decided to further lower the interest rate from -0.4% to -0.5% and that from November a new round of quantitative easing of 20 billion euros per month will be started.
As many readers know, this is just another round in a process that until now has led to misallocation, has caused problems for pension funds and has all but made saving meaningless. Real-life problems just to make debts cheaper and to pave the way to a new monetary system.
In the meantime, few people will have noticed that gold has now reached a new record in euros and that silver has risen sharply in recent months. The increases have taken place with a lot of violence and sometimes multiple percentages in a day. The same applies to the downward corrections and this violence can be an indicator of a number of possibilities, the most likely of which I would like to explain.
The circumstances in which gold and silver are rising seem partly based on fundamental reasons in the underlying economy and partly on a solid flight of capital in the safe haven that precious metals have been for thousands of years. After all, both monetary metals show an increase due to weakness in the currency in which they are measured or the threat of economic uncertainty. This also explains why we achieve new records in almost all currencies, but when measured in the dollar, the price of gold is still well below its 2012 record.
And those fundamental indicators in the underlying economy point to a deterioration of the economy almost every day, not only in the euro-zone but also in the rest of the world. For example, for the first time in 3 years, the industrial sector in the US contracted and Germany now has a quarter of contraction and a recession seems to be a matter of time in the EU's economic engine. No confidence-inspiring data points and also reason for consumers to postpone consumption.
Postponing consumption is a deadly sin for central bankers. And now that in the US too, the president is calling for interest rates to be lowered to zero or lower and for the FED to buy debts, the way seems to be paved to fully politicize policies pursued by so-called independent central banks. That this policy can hardly deviate further from the objective that the banks had when they were set up. In contrast to boosting inflation, the original purpose of central banks was precisely to prevent currency depreciation. Inflation was not allowed to exceed a certain percentage.
To guarantee independence, members of central banks were selected on the basis of knowledge and experience in the financial sector and without political affiliation. The appointment of Ms. Lagarde as President of the ECB also broke with that tradition. The same can be said about the president of the FED Powell who, after being appointed by President Trump, is criticized almost on a daily basis for the policy conducted by the FED. That the long-term consequences of this politicization of monetary policy will almost certainly be disastrous seems less relevant than the short-term benefits claimed.
That gold and silver have shown a significant increase in recent months, taking into account the above, suddenly no longerseemsstrange. While the "normalization" of interest rates and therefore the value of money was still taken for granted during the credit crisis for many investors, the circumstances are now really different. And other circumstances require a different approach. Fortunately we can learn from recent history. There are plenty of examples of governments that allowed monetary reins to be loosenedin favor of short-term political opportunity. And in those cases, the victims were the citizens who could not have foreseen that their government would allow them to be ledintothe financial abyss. The lucky few were almost always those who learned from history and applied an important truth in their investment choices. Currencies are intrinsically worthless, but you can’t print gold.