The summer is behind us. While equity trading volumes have yet to pick up, we’ve seen more activity from policymakers and central banks. Last week’s intervention by the Bank of Japan (BoJ) to halt the rise of the yen was a notable example. However, investors are likely to test the BoJ’s resolve. Germany is watching its competitive advantage ebb away as the euro-dollar heads back over $1.30. US policymakers are calling foul over Japan’s move and are gearing up to pillory China for currency manipulation ahead of the mid-term elections. Meanwhile, China has condemned the BoJ for cheapening the yen, making Chinese goods less competitive. There is a danger that this could develop into protectionism given the threat to jobs in all countries.
Today we’ve got the Federal Open Market Committee meeting. There has been speculation about the likelihood of another round of quantitative easing (QE). The recent poor US data suggests that a second round of QE could come soon. Weighing against any further stimulus must be the $1 trillion EU-IMF European bailout package earlier in the year. The initial positive market reaction faded remarkably quickly, so given the diminishing returns, further QE in the US will have to be sizeable. Not only would this add to the budget deficit, but it could terrify investors.
Against this background, silver and gold continue to soar. For as long as policymakers insist that boosting exports will save the economy while ignoring the fact that we can’t all run trade surpluses simultaneously, there will be a rush to devalue every fiat currency. As a result, precious metals would seem to be the most sensible asset for investors, being both a store of value and the ultimate medium of exchange for when people lose faith in their central banks’ promises to protect their currencies.