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MONETARY POLICY

Adding shine to stimulus

The fall in the gold price could give extra weight to pump-priming efforts by some central bankers to spark economies back into action

PUBLISHED : Thursday, 18 April, 2013, 12:00am
UPDATED : Thursday, 18 April, 2013, 5:33am

The slump in gold may hand activist central bankers more reasons to pursue the easy monetary policy that helped drive up the metal's price in the first place.

Among many explanations for the biggest drop in more than 30 years: a fourth annual global growth scare as data disappoints from China to the United States and investors fold long-held bets that monetary stimulus will ultimately unleash inflation. Other reasons for the drop range from a view that the price reached so-called technical levels to concerns that Cyprus could start a rush by indebted nations to sell their supplies of gold.

The combination of growth jitters and reduced inflation anxiety boosts the case of Federal Reserve chairman Ben Bernanke and counterparts elsewhere to keep pump-priming their economies in the hope they will finally secure traction. It also may help them beat back critics, including some US Republican lawmakers.

"Central banks can be opportunistic and proceed with quantitative easing now the gold market is surrendering with regards to its hyperinflation fears," said Edward Yardeni, president and chief investment strategist at Yardeni Research in New York. "They could also argue the weakness in commodity prices suggests a growth concern and so all the more reason to keep QE going."

Gold tumbled 27 per cent to US$1,387.40 on Tuesday from the US$1,908 it reached on August 22, 2011, and is in a bear market after a 12-year surge until last year that was fuelled partly by investors concluding that faster inflation and central-bank aid would buoy the metal as a protection of wealth. Its dive has come days before international finance ministers and central bankers meet in Washington to discuss signs of slowing in the world economy.

"Investors were somewhat optimistic that the relative strength we'd seen earlier in the year would continue," said Roberto Perli, a Washington-based managing director at International Strategy & Investment Group and a former Fed economist. "When you go through a soft patch like this, you are forced to at least think that maybe things could go in a different way than you believed."

US payrolls grew the least in nine months in March, China is suffering the weakest expansion in two decades with growth below 8 per cent, and unemployment among the 17 euro nations is a record 12 per cent. In the wake of such developments, the International Monetary Fund on Tuesday trimmed its estimate for global growth this year to 3.3 per cent from 3.5 per cent in January.

Such softness might help explain the sell-off in gold and other commodities, said Igor Arsenin, the head of emerging Asia rates strategy at Barclays in Singapore. Brent crude dropped below US$100 a barrel on Tuesday for the first time since July.

"You have a background of sluggish global growth, which weighs on commodity prices," Arsenin said.

That gave central banks justification for their monetary easing, said Jonathan Wright, an economics professor at Johns Hopkins University who worked at the Fed's division of monetary affairs from 2004 until 2008.

William Dudley, president of the Federal Reserve Bank of New York, and Charles Evans, president of the Chicago Fed, said there was a need to continue the central bank's US$85 billion in monthly bond purchases. The Bank of Japan this month doubled its monthly bond buying to 7.5 trillion yen (HK$597 billion) with the aim of achieving 2 per cent inflation within two years.

European Central Bank president Mario Draghi said two weeks ago that the bank stood ready to cut interest rates if the economy deteriorated further. Mark Carney, who is the head of the Bank of Canada but will become the Bank of England governor in July, said central banks should pursue "escape velocity" for their economies.

"With the recent signs of weakness, I don't see any likelihood of monetary stimulus being even ramped down any time soon," Wright said. "For the fourth year in a row, the year begins with noises about the imminent exit strategy, which then fizzles out."

The Fed, for example, would see cheaper commodities as reinforcing the need to keep buying assets for the rest of the year, said Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics in Washington. "We haven't recovered yet and we are not recovering fast," he said. "In no sense are we having an adequate recovery."

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