And away we go again…
The Swiss National Bank (SNB) surprised many global markets last Tuesday by stating it would buy unlimited quantities of foreign currencies to prevent the franc from rising against the euro. For the last few months the SNB has been struggling to keep its currency from being over-valued – in-turn threatening its export based economy.
Basically, Switzerland is now on a path to pursue a massive quantitative easing policy in the foreign exchange markets. Buying euros in unlimited amounts will weaken the franc by inserting more francs in the market. And thus you have triggered inflation.
If SNB policy will no longer allow the Swiss franc to be a currency safe haven, globally we should see a higher demand for gold…
How the SNB’s move affects gold
This makes sense.
Look at how and why gold is up nearly 35 percent since the beginning of the year. The U.S. and the Eurozone were printing paper money to keep economies afloat because they had so much debt that it was stunting growth across the globe. If the price of gold rose that much even with the Swiss franc as a safe haven, imagine the possibilities of the future with the SNB’s announcement.
Europe’s debt problems and the U.S. inability to create a job last month add fuel to the fire. Before Tuesday, many analysts began to upgrade their gold price targets for 2011.
And here’s something else to think about. Much of the drive for the rise in gold has come from investors a little wary of the health and well-being of the economies backing some of the world’s biggest currencies.
However, this lack of faith in the traditional European powers and the United States has caused a growing desire among emerging market central banks to diversify their foreign exchange reserves and gold has benefited from this action. Recent numbers from the IMF shows the world central banks have bought some 200 tons of gold since January.
Investors in exchange-traded products backed by physical gold have increased their holdings by a net 75 tons during this same time period. The SNB’s declaration will do nothing to deter this movement in the market.
So is there a gold bubble?
We are going to see more gold investing until the major players in the global economies can figure out a way to stimulate growth and create some sort of financial stability.
As seen and highlighted in the United States, Great Britain and across the Eurozone, fiscal and austerity measures are not popular with the voters and banks are looking to monetary policy to cure our woes.
What we have been experiencing is the beginning of global competitive devaluation. Central banks will likely continue to debase currencies to have “prettier” exports in an attempt to corner global markets. And while this trend may be the only course of action for the near future, do you think these policies have been factored into gold’s current price?
As Investment U’s Matthew Carr wrote a few months ago, gold ETF’s like SPDR Gold Trust (NYSE: GLD), PowerShares DB Gold Fund(NYSE: DBP), and iShares Gold Trust (NYSE: IAU) are all up nearly 30 percent this year. He also gave a list of gold mining stocks that could be very profitable value plays.