Ambrose Evans-Pritchard believes that the policies by the Fed and the Bank of Japan caused the sudden drop in gold prices last week. He writes:
It is becoming ever clearer that the roaring boom in global equities since last summer has priced in an economic recovery that does not in fact exist. The International Monetary Fund has had to nurse down its global growth forecasts yet again. We are still stuck in an old-fashioned trade depression, with pervasive over-capacity in manufacturing plant and a record global savings rate of 25pc of GDP.
... The upward trend of the great bull market has been broken. The technical damage is brutal. Bank of America expects a further drop to $1,200. Be patient.
My view is that the US Federal Reserve and the Bank of Japan "caused" the gold crash. The rest is noise. The Fed assault began in February when it published a paper warning that the longer quantitative easing continues, the harder it will be for the bank to extricate itself.
... This was a shock. It suggested that the Fed has lost its nerve, and will think long and hard before launching a fresh blitz of money if growth falters.
Then came last week's Fed Minutes, with hints of tapering off QE earlier that expected. That was the next shock. What they seemed to be saying is that the US economy is groping it way back to normality, that the era of silly money is over, that the dollar will stand tall again.
If that were the case, gold should fall. But it is not the case. The US economy is growing below the Fed's own "stall speed" indicator. Half a million people fell out of the workforce in March. Retail sales fell in March. So did manufacturing.
... My guess is that the Fed will be forced to row back smartly from its exit talk, but first we must look deflation in the eyes.
As for the Bank of Japan, it had been assumed that the colossal monetary stimulus of Haruhiko Kuroda would revive the yen-carry trade, leaking $1 trillion into world asset markets. But the early evidence is the opposite. Japanese investors brought money home last week.
"Mrs Watanabe" is selling her Kiwi and Aussie bonds to bet on stocks and property at home. And she is selling gold like never before. That too is a shock.
Japan's "Abenomics" may prove a net drag on the world over coming months. It is exporting deflation through trade effects. This already visible in Korea and China, where soaring wages have eroded competitiveness. "Investors may have forgotten that yen weakness was one of the immediate causes of the 1997 Asian currency crisis and Asia’s subsequent economic collapse," said Albert Edwards from Societe Generale.
China's growth rate fell to 7.7pc in the first quarter. It will fall further, though the catch-up boom in the hinterland cities of Chengdu, Chonquing, Changsa and Xi'an may have further to run.
Fitch Ratings says credit has surged from €9 trillion to €23 trillion over the past four years, a rise equal to the entire US banking system. Beijing pumped up loans yet again after its recession scare in the summer, but is gaining less traction. The GDP growth effect of credit has halved. It is the classic sign of an economy sated on debt. China too will have to deleverage.
The world is still in a contained depression. Sliding commodities tell us global money is if anything too tight. "There is a threat of deflation almost everywhere. A lot of central banks will have to follow the Bank of Japan, whatever they say now," said Lars Christensen form Danske Bank
The era of money printing is young yet. Gold will have its day again.
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