QE3 arrives

Ben Bernanke announced the latest round of Quantitative Easing in the United States yesterday.  This will involve buying 40 billion dollars of mortgage debt every month in an effort to force some life back into the housing and construction sectors. This an open ended program tied to improvements in the unemployment rate. The implication here is that this program could continue indefinitely with all the attendant dangers an open ended money printing program carries. The policy of near zero interest rates has been extended until mid 2015 – this will mean interest rates will have been hovering near zero for 7 years by that stage.

Gold and silver have been range bound in both euro and dollar terms this year but with the announcement of ‘unlimited bond buying’ by Draghi at the ECB followed on by yesterdays QE3 from Bernanke will likely lead to both metals (and oil and a variety of other commodities) moving up strongly out towards and beyond previous all time highs. At this point we would be very surprised if gold did not break above 1400 euro an oz at some point before the end of this year and silver should be able to regain 30 euro’s an oz in the same time frame.

The early part of this year was dominated by headlines about an improving US economic outlook and pronouncements about the ‘end of the gold bull’ market. We suggested at that point that clients take a sceptical view of the supposed US recovery and we believe the sluggish summer numbers in the US vindicate that stance.   Now there is slowly growing scepticism in the US over the ecomonic recovery and that scepticism is likely to grow louder as the American economy is likely to continue underperforming in relation to employment growth etc although we would not rule out a short lived ‘sugar rush’ effect from QE3.

In Ireland there is some optimism that things are getting better. And on one level that optimism is justified in that Ireland at least has a healthy balance of trade with a strong export sector which is critical to building real wealth. Also property prices in Ireland have already adjusted downward significantly and are still dropping in a way that puts us ahead of the European curve – most of this downward price movement lies ahead for countries such as Spain.

Optimism is further bolstered by news of Irelands return to the debt markets with headlines last week in the Independent about Ireland successfully raising 500 million in the bond market. This is where things start to fall apart. While looking at a picture of Michael Noonan grinning from ear to ear (after the bond auction) we were simultaneously looking at  levels of international debt in various western and Asian countries (http://usdebtclock.org/world-debt-clock.html) in order to keep this 500 million euro bond issue in perspective. Ireland’s public debt to GDP ratio is 171% which gives us the third highest public debt level relative to GDP in the developed world – only Greece at 185% and Japan at 196% are worse! But most shocking of all is our external debt to GDP ratio which stands at 1266% -the next worst figure is 498% owed by the UK. These sorts of numbers really highlight the nonsense of these Irish bond issues – we are able to borrow on international markets because investors believe the ECB and the Germans will pick up our tab and prevent a default. Only a fool would buy Irish bonds based purely on the strength of the Irish economy relative to its indebtedness. Add to this Draghi’s ‘unlimited bond buying’ and you have to conclude this will not end well.