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"Gold and fiat currencies"


Bernanke denies quantitative easing

However, in the Stamp Lecture at London School of Economics on January 13, 2009, Federal Reserve chairman Ben Bernanke, about three years into office, asserted that the Fed’s approach to supporting credit markets during the financial crisis was conceptually distinct from quantitative easing (QE), the policy approach used by the Bank of Japan from 2001 to 2006. The Fed’s approach – which Bernanke suggested could be described as “credit easing” – resembles quantitative easing in only one respect: both approaches involve an expansion of the liability side of central bank balance sheet without adding balancing assets.

Accordingly, Bernanke asserts that in a pure QE regime, the focus of policy is the quantity of bank reserves, which are liabilities of the central bank; the composition of loans and securities on the asset side of the central bank’s balance sheet is merely incidental. The implication is that the balance sheet can stay unbalanced due the fact that the asset side is a phantom number the underlying basis of which is the central bank’s newly created money. Nevertheless, QE is now the term generally used in the financial press to describe Fed “credit easing” monetary measures taken during the current financial crisis. The Fed’s past, current and future stimulus monetary measures are popularly referred to as QE1, QE2, QE3 … etc.


As a consequence, many investors, affected by Pavlovian conditioned reflex, sought out gold as an alternative to fiat currencies. This herd behavior trend is evidenced by large consumer purchase of coins and small bars in retail markets around the globe. Similarly, the gold exchange traded funds (ETFs) sector experienced consistently strong inflows of funds all through 2010, adding in aggregate over 270 tonnes of gold by Q2 to assets under management by ETFs.

Furthermore, net long positions on gold futures contracts, which are a proxy for the more speculative end of investment demand, also returned to high levels close to those seen during Q4 2009. Conventional wisdom suggests that longs on gold are essentially shorts on fiat currencies even though in reality, the simplistic correlation does not always hold.

(dogma-based, spit flecked, responses are encouraged! :) )

(points deducted from your score if you actually read any of the previous 7 parts of this series on gold)

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