Central Banks Spook The Markets: April 5, 2012

Another day, another gold price slump – though bullion bulls were joined on the window ledge by equity investors, with stock markets all over the world falling sharply. The Dollar Index moved towards three-week highs close to 80.00, with a disappointing Spanish bond auction causing traders to dump the euro. Yields on the 30-year US Treasury bond experienced their biggest drop of 2012 – testament to the prevailing “risk off” mood at markets.

Gold and silver have both lost 3% this week, and have fallen below important support levels. Gold’s decisive drop below $1,650 could put it on course to test $1,600 – round numbers always acting as support on the way down and resistance on the way up – while the silver price could test support at $30.

The Fed disappointed the markets on Tuesday, and yesterday it was the European Central Bank’s turn, with ECB chief Mario Draghi indicating that he was reluctant to undertake more monetary easing, owing to inflation concerns. Cue hedge funds throwing their toys out of the pram, with The Wall Street Journal talking of “fears that the central banks of Europe and the U.S. may soon end efforts to support financial markets.”

Any genuine retrenchment in policy by the ECB, Fed, and other central banks would cripple stock markets – the S&P 500 would probably fall below 1000 quicker than the time it takes you to say “bear market.” Which is a key reason why there will be no real tightening, and no return to a positive real interest rate environment in Europe or America anytime soon, central banks regarding stock prices as psychological tools as much as they think of them as financial assets. It’s very hard to convince people that all is well with the world and that they should go out and spend money when stock markets are heading south and financial media is full of doom and gloom.

A week or two’s worth of declines in American markets, accompanied by gains in the dollar should guarantee some Fed governor (perhaps even Bernanke himself) popping up to declare the “possible need for further easing” coupled with carefully worded concern about the sustainability of the US recovery. This should be enough to get the media’s QE3 rumour mill turning again, and send traders dashing back into equities and commodities. Buying gold will be in vogue again.