No way out for central banks

Evidence for this appears no more convincing than at anytime since the start of the Fed’s QE programmes back in 2009, but that hasn’t stopped the speculation, with one trader telling WSJ that Wednesday’s Fed minutes were “concerning for commodities across the board.”

He might have added that it was concerning for equities as well, given the sell-off we saw in stock markets and the spike in the Volatility Index (VIX). The euro also fell – a sure sign of “risk off” trading – while the Dollar Index moved above 81.00 and Treasury yields fell. News out this morning that the European Commission has downgraded its forecast for French and German GDP growth this year (to just 0.1% and 0.5% respectively) hasn’t helped the optimists.

The simple fact remains: central banks cannot normalise interest rates, because over-indebted economies won’t be able to handle higher rates without crashing. Real rates will remain negative for a long time to come. As hedge fund legend Stanley Druckenmiller points out in the CNBC interview below: “If you normalise interest rates – I'm not talking about a spike, just normalise where they were before QE and took them to 5.7% federal funding costs of the debt, that's $500 billion a year in interest expense that goes out door. We're having a heart attack over an $85 billion sequester when we can lose $500 billion just if you normalise. The way markets work if and when that were to happen, you don't normalise, you keep going because the market figures out that you now have a credit problem which is exactly what's happened in the foreign nations” (such as Greece).

Or as the Telegraph’s Ambrose Evans-Pritchard says: “We remain in a 1930s slump. Until this is overcome it is a fair bet that the Anglo-Saxon central banks and their OECD allies (basically everybody except Frankfurt) will stay uber-loose to mitigate the damage... so [regarding gold] hold your nerve. The reality is that we have been moving for several years to an informal Gold Standard in which gold takes its place once again as a central store of value – a currency of sorts – in the mix of sovereign reserves.”

The fundamental case for holding precious metals remains sound.