ECB, Bank of Japan’s Foolish Policies Drive Gold Higher

The European Central Bank (ECB) and Bank of Japan (BOJ) displayed their latest examples of stupidity in policy moves announced on Thursday.

At its monthly monetary policy meeting, ECB President Jean-Claude Trichet announced that the central bank will begin to purchase government bonds of several members of the PIIGS in an effort to stem the European sovereign debt crisis from spreading further.

Government bonds in each member of the PIIGS – Portugal, Ireland, Italy, Greece, and Spain – have all continued moving higher this week as fear has escalated throughout the euro zone.

The ECB’s move essentially involves the central bank printing more money, and follows its decision last year to purchase Greek bonds. While the move may cause a temporary reprieve, history suggests that it will exacerbate, rather than alleviate, the longer-term structural problems the euro zone is facing.

Over the past year, Greek bonds yields continued rising to new all-time highs despite Trichet’s efforts, as the ECB became the buyer of last and only resort.

Following the ECB’s meeting, the euro currency dropped 1.3% to 1.4137 against the U.S. dollar.

Unfortunately Trichet has not learned from his mistakes, and is instead doubling down on failed policies that are highly unlikely to work.

In an effort to trump the ECB’s follishness, the Bank of Japan intervened in the currency markets on Thursday to try to keep the yen from appreciating further.  Following the BOJ’s announcement, the yen posted its largest loss in five months, falling 2.3% to 78.84 against the U.S. dollar.

While the BOJ’s intervention worked in the very short-term, the past decade provides a plethora of examples indicating that the BOJ is incompetent at best and insane at worst.  After nearly each intervention effort, the yen declined in the short-term, but later reversed course and continued to move higher.

The latest example occurred in March 2011, when following the Japanese earthquakes and tsunami, the yen tumbled for several weeks.  However, last month the yen surpassed its March high on its way to yet another new all-time record level.

Central banks’ misguided policies have not been lost on the gold market.  COMEX gold futures for December delivery rallied to a new all-time high of $1,684.70 per ounce this morning, following the ECB’s and BOJ’s actions.

The ongoing race to debase among the ECB, BOJ, and Federal Reserve is reflected in the fact that the yellow metal has continued to climb to new all-time highs in terms of virtually every fiat currency in the world.