The latest Investing Matters Podcast episode featuring Jeremy Skillington, CEO of Poolbeg Pharma has just been released. Listen here.
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Cont 3
In the press, QE was generally presented as “The Bank of England prints money and lends this to banks so that they can increase their lending into the economy”, but this is completely inaccurate.
In reality, through QE the Bank of England purchased financial assets – almost exclusively government bonds – from pension funds and insurance companies. It paid for these bonds by creating new central bank reserves – the type of money that bank use to pay each other. The pension funds would sell the bonds to the Bank of England and in exchange, they would receive deposits (money) in an account at one of the major banks, say RBS. RBS would end up with the new deposit (a liability from it to the pension fund), and a new asset – central bank reserves at the Bank of England.
Quantitative Easing therefore simultaneously increased a) the amount of central bank money, which is used in the system that banks use to pay each other, and b) the amount of commercial bank money (deposits in the bank accounts of people and companies). Only the deposits can actually be spent in the real economy, as central bank reserves are just for internal use between banks and the Bank of England.
https://positivemoney.org/how-money-works/advanced/how-quantitative-easing-works/
Hi Herbie, The FED is up the creek without a paddle because their Certel members thought they could just carry on creating ever more electronic dollars and on placing huge sells of paper gold to keep the price of physical gold under the cosh and the dollar strong, they were arrogant and complacent because in the meantime the BRICS members have been lapping up the cheap gold whilst Fort Knox remains in the main devoid of that much American owned gold.
That said our BOE and thev LBMA are nearly as bad !
Cont- 2
The effectiveness of QE is extremely controversial. Indeed, our position is that it does more harm than good – and there are much better alternatives, but we are getting ahead of ourselves here. In our next post, we go into more detail on the theory behind QE, and in later posts, we show how QE doesn’t work in practice – and instead leads to more financial instability and inequality, as well as higher house prices.
It’s worth noting that QE is supposed to increase the price of financial assets, making assets holders feel wealthier – encouraging them to spend more (the so-called trickle-down effect). It’s also intended to lower interest rates in financial markets. This means lower borrowing costs, encouraging businesses to issue more debt to finance investment.
Low interest rates mean low returns for investors, and theoretically should encourage them to look for riskier, higher yielding investments. Finally, pension funds and insurance companies should buy riskier assets to replace the ones they sold to the Bank of England, all of which is intended to redirect credit and investment to businesses.
Hi 3Bear, I would go further although th general public, our politicians and indeed the majority of out financial journalists are either ignorant of or simply ignore QE is where central banks, such as the Bank of England, create new money out of nothing to buy financial assets (economic jargon for government and corporate debt in the form of bonds) from financial entities such as pension funds, insurance companies and investment banks, etc.
In the media, QE is presented as a process whereby the Bank of England prints money and lends this to banks so that they can increase their lending into the economy. But in reality, no actual physical cash is ever printed and most people (let alone banks) don’t ever see the money created via QE.
What actually happens is the Bank of England creates new digital money, central bank reserves, which are then used to predominantly buy government debt (and more recently corporate debt). From 2009 to 2012, the Bank of England created £375 billion of new money.
This programme is still on-going. In fact, more recently the Bank of England announced that it would be expanding the programme by another £70 billion, bringing the total to £445 billion. Concerned that investment and spending might drop due to the Brexit vote, the Bank of England will purchase another £60 billion worth of government debt, and £10 billion worth of corporate debt.
cont
Yes but expect the Fed to short gold at 14:30 UK time as they did fruitlessly yesterday - buying opportunity.
3 bear,
The rally was very stable up to 20 March. Beyond that time frame it started to become over extended and not just a spring seasonal rally. On 2 April the rally was approaching $2300 spot price which should have been a top with a 14.5% rise but then it started to go parabolic. The momentum then hit 17% rise at 2350 spot price where only a handful of rallies have surpassed this. The peak was around 20%. The rally started on 12 February. Central banks (especially India and China were behind the move from 12 February to 29th February) and published data of late shows this was the case.
The concern some of us have is that the rally was taken over by Options traders and they have to take physical delivery on 25th April. I therefore believe the answer to your question will soon reveal itself. My belief is that part of the rally is permanent and it needs to retreat to a level to attract buying in the physical market for delivery. Over the course of 2024 we may get more rallies and pull backs. The jewellery market has to restock gold at a price where they can sell it later on and it just takes time for the physical market to absorb increases. Otherwise we get bear markets in gold later on. Tony
3bear we all hope so but when markets collapse, as we have experienced before, holders can also sell gold to raise liquidity, or buy it as a hedge; gold is marvellously fickle a bit like the spouse, always keeping one on one's toes as for any action the reaction may be unpredictably one way or the other. Above all we have learnt not to count our golden flip flops before we have worn them so to speak.
There was a good FT piece yesterday by Rana Foruhar headed'Gold is back and it has a message for us' , which inspired me to buy a book it mentioned 'The New World Economy in 5 Trends' by BNP Paribas chief strategist Fortis Philippe Gijsels, and the chief economist Koen De Leus which predicts gold running to $4000 in the not too distant future but who really knows. Anyway I will read it.
Anyone share my view that this rise in the GP is permanent and largely due to 2020's colossal international QE finally feeding through to all corners of the financial system?
There won’t be any bad news Tony.
If you look at the gold price pump and dump it was well outside the Iran attack so nothing to do with it and it shot up and dropped within a few hours- and 24 hours before the attack which was outside trading hours in any case.
Of course, it is due for tensions, but not inside knowledge of a “known” activity about to happen.
Gold has been taken higher again tonight and all the overbought on daily and weekly were returned as they were before at the peak on Friday. What I am concerned about is what kind of bad news will soon unfold and be shared with the general public.