Bank of Japan fires its bazooka

2012-FEB-14

Gold and silver prices continue to consolidate. Absent some kind of black swan event, this is likely to remain the case until the end of this month, when the European Central Bank announces its second “long-term refinancing operation” – or “LTRO2” as some have dubbed it. If the ECB surprises the markets with a bigger than expected lending programme, then precious metal prices will likely break above resistance levels ($1,750 for gold and $35 for silver) and rally sharply higher. The market’s reaction may be somewhat muted, however, if the ECB “disappoints” with less lending than expected.

Nevertheless, people are starting to adjust to the fact that the ECB remains just as committed to keeping the credit bubble inflated as other central banks – a fact with obviously bullish implications for precious metals. As James Turk mentions in his latest King World News interview, central banks will do all that they can to prevent a deflationary collapse – including dropping $100 bills from helicopters if necessary.

Though the news has been blunted somewhat by Moody’s announcement that it has downgraded Italy, Spain and Portugal (and put the UK and France on negative watch for a downgrade) the Bank of Japan this morning announced a Valentine’s Day present to the markets in the form of ¥10 trillion’s (US$130bn) worth of quantitative easing. The Japanese government remains heavily indebted – government debt as a percentage of GDP stands at 220%, a higher percentage than any other economy in the world – while its export-driven economy has been hurt badly by the yen’s steady appreciation against all major currencies over the last five years. On top of this, the reconstruction costs from last year’s Tsunami and earthquake have piled an additional financial burden on to the economy.

Given all of this, it’s unsurprising that the Bank of Japan is seeking to weaken the yen. The problem, of course, is that the BoJ is fighting not only traders’ long-held view of the yen as a safe-haven currency, but also other much bigger central banks such as the US Federal Reserve and People’s Bank of China, who also do not want to see the currencies they issue consistently strengthening against their major trading partners (of which Japan is certainly one). So this latest QE from the BoJ will likely end up being just as “unsuccessful” as their previous recent efforts at weakening the yen against other currencies – though of course they remain immensely successful at weakening the yen relative to gold.

The US dollar gold price, however, remains unmoved by this BoJ move. As ZeroHedge wryly notes: “The rub however lies in the total Japanese GDP, which at last check was $6 trillion (give or take), and declining. Which means this announcement was the functional equivalent to a surprise $325 billion QE announced by the Fed. What is ironic is the market reaction: the BOJ expands its LSAP by 18% and the USDJPY moves by 30 pips. As for gold, not a peep: as if the market has now priced in that the world's central banks will dilute themselves to death. Unfortunately, it is only at death, and the failure of all status quo fiat paper, that the real value of the yellow metal, whose metallic nature continues to be suppressed via paper pathways, will truly shine.”