Risk Update: Belief in Central Bank Proclamations

by Jeff Clark – Hard Assets Alliance :central bank proclamations

Did you know that just two days before the SNB announced they would no longer peg their currency to the euro, SNB VP Jean-Pierre Danthine stated the following to Swiss broadcaster RTS?

“We’re convinced that the cap on the franc must remain the pillar of our monetary policy.”

They changed their mind in 48 hours? Far more likely is that they didn’t want to telegraph the move in advance.

What about the massive QE effort undertaken by the ECB—should we be confident this will solve their problems? No, because according to French bank Société Générale, it isn’t big enough!

The potential amount of QE needed is €2-€3 trillion. Hence, for inflation to reach close to a 2.0% threshold medium term, the potential amount of asset purchases needed is €2-€3 trillion, not a mere €1 trillion.

That is ludicrous and what we should expect from those that view the world through an economic model. The fact that many investors also see this insanity for what it is partially accounts for gold’s positive response…

• “The belief in central banks as the providers of market stability suffered a serious blow last week.” (Chief commodity strategist Ole Hansen at Danish bank Saxo)

• “But to think the ECB has a magic wand and will change all the situation in Europe by its magic wand, in my opinion is not the appropriate reasoning.” (Jean-Claude Trichet, Mario Draghi’s predecessor
at the ECB, who can now speak freely about central bank actions)

What about the US Fed balance sheet?

“The Fed’s balance sheet is a pile of tinder, but it hasn’t been lit… inflation will eventually have to rise.” (Former US Federal Reserve Chairman Alan Greenspan, who can now also speak freely)

By the way, he added this in the same interview:

Question: “Where will the price of gold be in five years?”
Greenspan: “Higher.”
Question: “How much?”
Greenspan: “Measurably.”

What all this means to us is that it’s dangerous to your wealth to believe central banker proclamations (at least while they’re in office). Gold, in spite of its volatility, is more trustworthy—it answers to no one, can’t be created with the click of a button, and has never required the credit guarantee of a third party.

Article originally posted in the February issue of Smart Metals Investor at HardAssetsAlliance.com.