Euro to ECB (and gold bugs): Be careful what you wish for...

 

SO the European Central Bank has a big headache, writes Adrian Ash at BullionVault.

 

Luckily the Catholic Church, Europe's previous faith-based union, has a patron saint for such sufferers – St.Teresa of Ávila. Her most famous quote?

Take note, Team Mario. Because try as they might, the ECB are desperate to devalue the Euro. But they can't. That's making gold and silver's recovery from the last 3 years' drop all the harder. But gold isn't the ECB's worry. Deflation is.

 

Despite the money glut worldwide, the value of cash risks going up – a reversal even Germany's inflation-hating Bundesbank now accepts it must fight. Hence Thursday's "shock and awe" from Frankfurt.

 

Acting on behalf of 18 nations with 330 million citizens, the world's biggest currency issuer moved this week to negative interest rates... unsterilized bond purchases... huge new 4-year loans to commercial banks...and preparations for QE money-printing to buy private-sector asset-backed bonds.

 

The effect on the Euro?

 

It dropped barely 1 cent to the Dollar, only to jump straight back up on the currency market...and start setting new 2-week highs. Holding above $1.3650 again on Friday in fact, the newly "devalued" Euro stood at what were 2-year highs when reached last autumn. 

 

What must a central bank do to devalue its own currency? Truly massive QE awaits, we guess, in the end. But like Japan over the last two decades, the Eurozone will take a long time to get there. And even then, as Japan shows, trying to devalue through huge money creation won't count for much if all your export competitors are doing the same.

 

Gold, silver and other scarce assets look long-term winners. Because after the British Pound stole a march on everyone else at the depths of the 2008-2009 crisis, competitive devaluation is failing. The more zero rates and QE fail to move the needle, the more central bankers will try to out-zero and out-print each other. So the more that mass devaluation of all currency will become a real risk. 

 

Like all financial crises, it will happen very, very slowly. Few people will notice. And then, all of a sudden one day, it will look blindingly obvious. Long-time precious metal owners might be wise to avoid saying 'Told you so'. Amid a true currency crisis and hyperinflation, they might also live to regret having their prayers answered as well.