Central Banks Slash Interest Rates to Prevent Global Depression

Gold fell nearly 1.6% yesterday on light volume as the dollar remained firm. Buyers held back waiting on important interest rate decisions in Europe today and the release of U.S. nonfarm payrolls data tomorrow. Gold remains firm in British pounds and Euros at 523/oz and 613/oz.

Nonfarm payrolls are expected to be poor (economists expect US employers slashed nonfarm payrolls by 320000 in November, which would be the sharpest drop in employment since 2001) and this should put pressure on the dollar and equity markets and see gold remain firm.

Central Banks Slash Interest Rates to Prevent Global Depression

Central banks internationally are slashing interest rates at an unprecedented speed to unprecedentedly low levels in a desperate effort to prevent a global depression. Overnight the New Zealand central bank slashed rates by a very large 1.5%. The Swedish central bank has cut by a huge 175 basis points to 2% already this morning and the ECB and Bank of England will also slash interest rates later this morning. The Bank of England is expected to cut by 100 basis points to two per cent - equal to their lowest level in more than 300 years in 1694. Some economists are forecasting a slashing of rates by 150 basis points – from 3% to 1.5% - an all time historic low.  

The ECB is expected to cut by 50 or 75 basis points – from 3.25% to 2.75% or 2.5%. The monetary hawks from the Bundesbank are likely to push for the lower 50 basis points as the rightly realize that central banks are increasingly pushing on a string and realize that these short term interest rates cuts are likely to lead to significant inflation in the coming years. The lower we go now and the longer we remain near historic lows the more inflationary pain there will be when deflationary pressures subside and this will result in far higher interest rates in the long term.

The hawks in the ECB realize that short term thinking and cheap money panaceas got us into this mess and unfortunately they will not get us out. Especially as banks remain reluctant to lend to each other and the wider economy and there are real concerns as to whether the interest rate cuts will be passed on to consumers. Meanwhile prudent savers are again being penalized as inflation, which remains stubbornly high despite recent falls, sees them receive a negative return.

HSBC Fund Returns to Buying Gold to Hedge Against Inflation

While deflation has been and may continue to be the primary force in the global economy in the short term, medium to long term investors should be positioning themselves in the coming months for the reemergence of inflation – potentially of a very severe nature. Bloomberg reports that HSBC Investment Management’s $2.6 billion Absolute Return Service started buying gold again recently on expectations that inflation will accelerate. “Gold is the best supported of all commodities,” said the fund’s manager Charlie Morris. “People are buying in anticipation” of inflation, he said.  (see News section).

Inflation remains the biggest threat to investors and especially savers in the medium to long term. Especially as central banks engage in quantitative easing and printing money to intervene in and manipulate markets including buying their own bonds and government debt in order to artificially suppress long term interest rates (as recently suggested by Ben Bernanke).