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Chinese monetary officials sent shock waves through financial markets today by announcing that the People's Bank of China would be cutting interest rates for the first time since 2012. The world's second largest economy has experienced a serious slowdown in growth over the past year. It's popular (and justified) to pile on policy makers in the United States and Europe for amassing mountains of debt and pursuing easy-money policies, yet today was a sobering reminder that failed government policy is not only a Western dilemma.
Speaking of Europe: Mario Draghi, President of the European Central Bank, was not to be outdone by his Chinese counterparts, announcing Friday that the ECB is going to target higher levels of inflation. This will be welcome news to the debt-burdened governments in Greece, Portugal, Spain and Italy.
Impact on Gold
These moves are also welcome news to the owners of precious metals. Gold futures reached a new monthly high on the New York Mercantile Exchange in wake of these announcements. This makes sense given gold's historical role as a hedge against inflationary fears, but the rise was a little more sudden than some expected. For those who consider it important, gold passed the much-celebrated $1,200 / ounce mark during the trading session.
In the short term, it is likely that these gains will be muted a little after India recently announced more restrictions on gold imports — which is significant since India is responsible for about 20-25% of all gold purchases. On top of that, expect the U.S. dollar to seem momentarily stronger against Chinese and European paper.
In a way, the Chinese announcement is disheartening. Keynesian stimulus methodology still holds considerable sway in every single major global monetary institution, meaning that the pattern of debt, inflation, currency collapse and economic calamity will likely continue.
As monetary historians and numismatists know, the real boost for precious metals doesn't happen on the heels of an inflationary push. It comes later. Sometimes much later, after new money has filtered through the banking system and forced its way underneath the prices of consumption goods. New money and slower growth are a monetary time-bomb, so to speak.
Short-sighted market technicians and analysts might miss it, but the near 30% drop in the price of precious metals has created quite the opportunity for responsible investors with a gold-backed hedging strategy.
All in all, gold has appreciated more than 6% in the past two weeks. Palladium, platinum and silver all saw even larger gains on Friday than gold did. It might be time for value investors to start looking at these as possible assets in their retirement portfolios, especially if they already have some gold holdings.
Central Bank Gold Purchases to Rise
There is going to be an interesting supply/demand dynamic over the next two years. We've already detailed how the world is slowly but surely running out of easy gold deposits and that global production has likely peaked. That will reduce supply moving forward from the historical average. Maybe more important is are the signs that central banks are likely to increase their gold holdings next year and for years to come. If gold purchases become competitive, prices could skyrocket.
The International Monetary Fund reported that Russia added enough gold reserves in October to bring their holdings to the highest levels in more than two decades. The Swiss and the Dutch are trying to force their central banks to raise gold reserve ratios. And the World Gold Council predicted this week that global bank purchases of gold may climb by as much as 22% in 2014.
Adding Gold to Your Retirement Account
Gold might be historically undervalued right now, presenting an outstanding buying opportunity for long-term retirement savers. A safe, tax-advantaged way to take advantage of the power of physical gold in your retirement account is to open a self-directed Gold IRA.