This morning the Bank of Japan announced it cut rates to a range of 0 to .1 percent, the lowest level since 2006. The move was deemed “comprehensive monetary easing”.
Japanese policy will create a 5 trillion yen (or $60 billion) fund to buy government bonds and other assets at a time when growth is cooling and a preventative stimulus action has been under review by other central banks across the world. You are probably wondering about the following two important questions:
1) What is “comprehensive monetary easing”?
Basically, the Bank of Japan is pledging to keep interest rates at zero until prices start rising again. In other words, Japan’s central bank is flexing their biggest guns to end deflation. Such a policy could take a few years to see a turnaround effect in the real world. So, many analysts and economists conclude rates will remain very low for the foreseeable future.
2) How does “comprehensive monetary easing” affect Gold?
At the start of the Summer, we joined FOX Business and MarketWatch labeling the monetary easing phenomenon as a setup for “The Paper Chase Trade.” Back then, GLD (the SPDR Gold Trust) was trading at $120 per share.
So long as central banks are lowering interest rates and keeping rates low as a necessity to stimulate economic activity, then the hot printing presses will debase currencies and inflate the value of hard assets such as Gold. Take today for example: following the Bank of Japan policy action, Gold is up almost 2% and continues to hit all-time highs.
Clearly, central bank “comprehensive monetary easing” is sending Gold (GLD) higher. But we remind you to navigate the precious metals asset class with savvy as volatility and hiccups could enter the picture along the way.