One of the most powerful factors affecting the direction of precious metals has been the bond buying by central banks the world over. While the ECB has officially stated its opposition to enacting a sizable bond buying purchase program akin to the programs seen in Japan, the U.K., and the United States, its Securities Market Programme (SMP) has been a significant tool in Europe's fight to contain the sovereign debt crisis. While this program still totals less the 500 billion EUR, it is exactly the type of quantitative easing that has been seen in Japan, the U.K., and the U.S. Nonetheless, the ECB can claim that it is not monetizing the debt of member nations (though it clearly is), since the scale of its operations are dwarfed by its peers.
What has arguably been more significant for the fortunes of at-risk European sovereigns was December 21, 2011's Long-Term-Refinancing-Operation (LTRO). This operation provided unlimited 3-year funding for European banks at 1%, and banks ultimately took a total of 489 billion EUR of funding from the ECB, well above the amount that had been forecast. European banks and sovereigns, facing a mountain of refinancing needs in 2012, and increasingly shut out of the wholesale funding market, desperately needed this sort of cheap funding. The first LTRO coincided with a bottoming in risk assets and precious metals, and the start of one of the best starts for both in over a decade. Why is all this important? Because on February 29th, 2012, the ECB is scheduled to do its second LTRO, and current expectations see an even larger amount of funds lent out to European banks.
There can be little doubt as February 29th approaches, comparisons to what happened after the first LTRO will appear with ever greater frequency. It is hard to see how such a large money printing excercise won't ultimately impact all markets, including those for gold and silver.
Other Recent Central Bank Monetary Expansion Announcements
On February 13th, the Bank of Japan (BoJ) announced that it would expand its bond buying operation by 10 trillion yen, equivelant to $130 billion USD. This is not a trivial amount as evidenced by the decline in the value of the JPY versus the USD since the announcement. Significantly, the BoJ also announced its intention to target a 1% inflation target.
On February 9th, the Bank of England (BoE) announced that it would expand its bond buying operation by 50 billion pounds, equivelant to $79 billion USD. Once again this is not a trivial amount as again evidenced by the decline in the value of the GBP verus the USD since the announcement.
The ongoing desire by central banks to lower interest rates, thereby reducing the relative attractiveness of their currency is almost universally seen as beneficial for precious metals, including gold and silver. These recent announcements come ahead of what will likely be an outsized monetary exapansion by the ECB come February 29th, 2012.
Current ECB Balance Sheet Set to Soar - Will Rival U.S. Federal Reserve
Since the 2008 mortgage meltdown, the balance sheet of Western central banks have exploded, corresponding well with the rise in precious metals, including gold and silver. The latest monetary expansion decision by the U.K. and Japan will expand the balance sheet of both respective central banks. However, the upcoming second LTRO by the ECB, will lift the ECB's balance sheet to rival the U.S. Federal Reserve.
Currently the ECB's total balance sheet exceeds 2.5 trillion EUR, rising over $1 trillion EUR since 2008.
Comparatively, the Federal Reserve balance sheet now totals just over 2.8 trillion US dollars. This compares to under $900 billion in 2008. Said another way, the Fed's balance sheet has expanded by just under $2 trillion dollars since 2008.
One thing that has been abundantly clear for precious metals investors is that a weaker USD has been negatively correlated with gold prices. With all major world central banks engaged in very similar monetary easing endeavors, precious metals will likely remain well supported, extending the ongoing, multi-year rally for both gold and silver.
2/29/2012 will be ECB's day, but the Federal Reserve may not be far behind with QE3
While the next day to watch is clearly the 2/29/2012 second LTRO by the ECB, it should be noted that today's release of the latest FOMC minute meeting clearly showed that Fed members are considering additional bond purchases, or QE3, to further support the U.S. recovery.
However, first things first. As February 29th draws nearer, expect expectations of another gigantic monetary expansion to provide ongoing support for the gold and silver market. Visions that the Fed might quickly follow suit shouldn't be overlooked however. Expectations of ever easier monetary policy by the world's central bank are likely to remain for the forseeable future, providing support for precious metal prices.
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