Will Draghi and the ECB Follow the Lead of the US and UK?

The ECB announced that it would take initial steps towards a US-style quantitative easing program (QE). The announcement makes one wonder – by how much have central banks expanded their balance sheets since the onset of the financial crisis.

The following graphic has a look at the growth in money supply across the globe since 2009. Two words might describe the figure – awe-inspiring.

Here’s a look at just the big four central banks.

One thing is certain from these graphics – central bankers are actively engaged in manipulating the prices of financial assets. Interestingly, of the big three the EU has increased their money supply the least. Whether one likes the continued manipulations of central bankers, one important question both sides of the debate must ask themselves is – How will the central banks bring their balance sheets back to more reasonable levels? This question, of course, is not easily answerable.

Individuals who think central bankers are doing incredible good by further manipulating the financial system generally do not care about the exit game. Instead, observers with this agenda essentially say something to the effect of „we’re in a crisis right now. Let’s get through the crisis and deal with the repercussions down the line.“

In contrast to such a view, prudent financial observers see the incredible risk and precedent the enormous expansion of the global money supply has created. These questions and views are, of course, just that – viewpoints. Markets will evaluate the actions of the world’s central bankers at a later date. With that said, what does the gold market think of the central bankers‘ actions? Here’s how gold has performed since 2009. Overall, gross expansion in central bank balance sheets is good news for owners of gold and other precious metals.

One could reliably assume that if the European Central Bank succeeds in following the US/BOJ’s lead in expanding the EU’s money supply, there is a high likelihood of further strong appreciation in the price of gold in the near future.

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This information is intended to assist investors. The information does not constitute investment advice or an offer to invest or to provide investment services and is subject to correction, completion and amendment without notice.