The price of gold slumped into February after the People’s Bank of China (PBOC) injected emergency liquidity into the financial system to shore up stock prices amid the coronavirus scare. But as Peter Schiff warns, there’s only so much inflation central banks can pursue before it starts to backfire.
The onset of coronavirus triggered one of China’s worst stock-market meltdowns since the financial crisis. On Monday, mainland indexes were down as much as 9% in the first session back from the extended Lunar New Year holiday.
On the very same day, the People’s Bank of China injected 1.2 trillion yuan (U.S.$174 billion) into the financial system. The liquidity boost was meant to ease investors’ anxiety over the coronavirus outbreak, which has killed almost 500 people and infected 24,000 more.
The PBOC’s boost appears to have stabilized mainland markets and contributed to the sharp recovery in global stocks. Armed with fresh rounds of Federal Reserve liquidity and renewed easing from China, portfolio managers have been snatching up U.S. stocks over the past three days.
The Dow Jones Industrial Average was up another 480 points on Wednesday, and has recovered more than 1,000 points over the last three sessions.
Since the Fed resumed quantitative easing in September, U.S. stocks have risen in virtual lockstep with the central bank’s balance sheet.
The renewed appetite for risk has not only propped up stock prices, it has triggered a sharp correction in the price of gold.
Since rallying to three-month highs on Jan. 30, the gold price would go on to dump more than 2% over three trading days. The yellow metal corrected higher on Wednesday but still remains well off last week’s high.
Gold for April delivery climbed $10.70, or 0.6%, to $1,566.20 a troy ounce on the Comex division of the New York Mercantile Exchange. Last week, prices peaked just north of $1,590 a troy ounce.
Euro Pacific Capital CEO Peter Schiff tweeted earlier this week that the actions carried out by PBOC and other central banks will be a net positive for gold in the long run. That’s because “creating inflation to prop up stock prices is more bullish for gold than equities.”
Gold is an established hedge against inflation, something central banks the world over are aggressively pursuing. Collectively, central banks slashed interest rates 66 times in 2019, yet conventional measures of inflation remain below target.
As Mohamed El-Erian said earlier this week, investors seem to believe that central bank easing “can decouple us from fundamentals for a very long time.” According to Peter Schiff, investors will probably change their tune once they realize that monetary policy is never going to be normalized. When that happens, the dollar could see enormous volatility.
The yellow metal has traded at record highs in virtually every currency except the dollar. If Schiff’s thesis is correct, dollar-denominated bullion could return to record levels sooner than later.
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