Written by The GoldMoney Dealing Desk
From Gold Money
The gold price has rallied strongly, reaching $1,415 per ounce this morning. News that G7 central banks will intervene to contain the value of the yen has also given a significant boost to all stock and commodity markets. Confirmation that the UN has approved a no-fly zone over Libya has seen media attention return to the problems in that region, boosting oil prices.
That the Bank of Japan (BoJ) has secured the cooperation of other G7 central banks in containing the value of the yen has boosted market sentiment, as hedge funds around the world have long relied upon the spread between borrowing in low-value yen (at low Japanese interest rates) to fund riskier, higher-yielding asset purchases in other countries.
This yen carry trade appeared at risk on Wednesday, as liquidation by Japanese investors caused the yen to surge to record levels. At one point the USD/JPY reached a post-Second World War record low of 76.25. This threatened many hedge fund investments based on borrowed yen, as the increasing value of the Japanese currency makes such yen loan repayments more onerous for foreigners.
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As a result, the surging value of the yen led to hedge fund selling across a range of assets – including gold. Intervention by the Bank of Japan and the G7 appears to have halted this sell-off, although – as the Bank of Japan found out last year when it intervened to try to weaken the yen for the benefit of Japan's exporters – there are no short-term guarantees. The yen may still surge, in which case renewed selling by hedge funds caught on the wrong side of the carry trade is highly likely.
In the long-run, such inflationary shenanigans by the BoJ will provide yet another boost to the gold price. So far this week, the bank has injected 37 trillion yen into the banking system – with more highly likely. The world is drowning in paper money.
Significantly, the Federal Reserve's efforts to debauch the US dollar appear to be bearing fruit: figures released yesterday by America's Labor Department show the US Consumer Price Index increased 0.5 per cent in February to 2.1 per cent – the largest monthly-increase since June 2009.