The ECB May Buy Gold To Combat Deflation

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Never Underestimate the Power of a Central Bank Scorned

Central banks adore inflation as it helps to boost asset prices and keeps borrowing costs for their governments low. Central banks want inflation but, despite printing massive amounts of their respective currencies, are having a hard time getting it.

Buying gold is now on their agenda as a way of creating inflation and defeating deflation.

Deflation is the sworn enemy of central banks. For months central banks have been warning about deflation. Former Fed Chairman Ben Bernanke went as far as to suggest that if deflation ever became a problem the Fed could do helicopter drops of cash to offset it.

Gold is historically the enemy of central banks because it is a competing currency. Former Federal Reserve Chairman Alan Greenspan recently remarked:

“Gold is a currency. It is still by all evidences the premier currency where no fiat currency, including the dollar, can match it.”

A rising gold price alerts markets that central banks’ policies may be too loose, interest rates too low and currency creation too great. Gold is an inflation warning sign.

Got Deflation? Buy Gold!

Gold, however, may now become a central banker’s best friend. As central banks around the world fret about deflation, the European Central Bank (ECB) is currently contemplating buying gold.

According to a Bloomberg report today:

ECB President Mario Draghi said yesterday that unconventional measures may include the purchase of a variety of assets to stimulate the economy. The central bank could theoretically buy sovereign debt, gold, exchange-traded funds, and even real estate to counter a longer period of low inflation, Executive Board member Yves Mersch said.

It stands to reason (in perverse central banker thinking) that if they want inflation, they need a higher gold price! Thus, the ECB is contemplating attacking the symptom of deflation (a declining gold price) by buying gold to cause its price to rise. This is like one who is praying for rain and pouring water on the side walk because when there is water on the side walk it means it has rained. If it doesn’t rain, the hapless hopeful rain gatherer will usually pour more water on the side walk and wonder why it hasn’t rained yet.

We’ve seen the Bank of Japan finally lose all semblance of fiscal responsibility and sanity with its latest round of stimulus that will have it buying just about every bond the Japanese government issues. It is now perhaps the European Central Bank’s turn to join in the fiscal madness by buying all sorts of assets including gold.

Can QE4 in the United State be far behind?

Against this back drop of central bank lunacy is it any wonder the Swiss people want their gold back?