Gold shines on new stimulus hopes

After being volatile for the past few months, precious metals prices are beginning their uptrend once again as the Fed and ECB prepare to step in. There is hope that central bankers all over the world will swoop in with a global synchronized stimulus push in an effort to promote global growth.

By Anthony Mirhaydari
7/25/12
MSN Money

The fog is lifting. For months, stocks and precious metals have been mired in a highly volatile sideways trading range. Investors, based on sentiment surveys, just can't decide what comes next.

Yes, the global economy is clearly slowing, with manufacturing activity and corporate earnings revisions dropping to levels not seen since we were sliding into the abyss in late 2007. And big-time problems loom, such as a possible eurozone breakup and the fiscal cliff of U.S. tax hikes and spending cuts due in early 2013.

Yet there's hope that central bankers around the world will swoop in with a globally synchronized stimulus push. Over the past two days, we got indications out of the Federal Reserve and the European Central Bank that, indeed, more help is coming. And that's helping push gold and silver and related mining stocks into what looks like a powerful new uptrend.

goldchart

It's worth noting that central bankers have already taken action.

The Chinese have started cutting interest rates for the first time since 2008. The British have unveiled new lending support measures and expanded their bond-buying program. The ECB has cut its deposit rate to zero for the first time, forcing excess bank reserves out of its vaults and into the financial system. And last month, the Fed extended its $400 billion Operation Twist -- whereby it sells its short-term Treasury bonds and buys long-term Treasury bonds as it tries to lower long-term interest rates -- by an additional $267 billion.

First let's talk Europe. With Spanish bond yields rising into unsustainable territory, Greece looking increasingly unable to meet its debt-reduction targets, and Madrid threatening chaos by moving toward requesting a full formal Eurozone bailout if the ECB doesn't take more aggressive action, there is chatter from ECB officials that it's considering granting a banking license to Europe's new bailout fund, due online in September.

This is a big deal. Madrid is looking to show Germany and its allies at the ECB that they are politically isolated and will soon have no choice but to act. Either they watch as Spain drains what's left of Europe's bailout funds and ignite outright financial crisis (indeed, Moody's has cut its credit outlook on both Germany and Europe's existing bailout fund in recent days) or they finally move to support Spain and Italy with a steadfast commitment to cap borrowing costs or find some other strategy.

Also contributing is word that European Union officials are considering giving Greece some breathing room by allowing the ECB to take a loss on its Greek bond holdings. That would immediately reduce Greece's debt overhang and help the country regain its footing.

Both are essentially complicated ways to get freshly printed euros into the hands of troubled governments. And given the situation we're in, that's a good thing.

Here at home, Fed mouthpiece Jon Hilsenrath at The Wall Street Journal published an article noting that officials "impatient with the economy's sluggish growth and high unemployment are moving closer to taking new steps to spur activity and hiring" and could unveil something as soon as the Aug. 1 policy announcement.

Options apparently under discussion include a QE3 focused on mortgage securities, extending the Fed's near-zero-interest-r​ate commitment beyond 2014, or pushing the interest rate it pays banks that park funds at the Fed's vault down to zero (from 0.25% now on some $1.5 trillion in excess reserves), mimicking a recent move by the European Central Bank.

To summarize: More cheap cash is about to hit the global financial system as central banks pump out more money and find new ways to browbeat banks into using it. This is all a positive for growth. And it will push up inflation, to potentially dangerous levels, depending on what happens with food and fuel supplies amid Middle East turmoil and extreme weather.

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