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A Shock To The Loose Monetary Policy Will Push Gold Higher: Boeckh

By Neils Christensen of Kitco News
Friday June 21, 2013 9:04 PM

(Kitco News) - It is only a matter of time before there is a shock to the current monetary policy system, said Tony Boeckh, famed Canadian economist, editor of the Boeckh Investment Letter and president of Boeckh Investment Inc.

Workers laying the foundation for the new ball mill
Photo by Kitco News: Tony Boeckh, editor of the Boeckh Investment Letter and president of Boeckh Investment Inc.

Boeckh was the keynote speaker at a luncheon Wednesday, hosted by the Montreal Economic Institute, a public policy economic think-tank, based in Montreal, Quebec. Boeckh said that based on recent history, gold prices should move higher as a result of “terrible economic policy decisions.” He added that he sees a lot of similarities between the major bull rallies in the 1970s and early 2000s and what is currently happening.

Although prices could continue to go down in the short term, as seen Thursday, when gold hit a 2 ½ year low, Boeckh said he expects gold to rally in the long term as investors protect their capital in a high inflationary environment. Boeckh added it is difficult to make a strong short-term bullish argument for gold with a generally weak commodities sector, a strong U.S. dollar and higher equity prices.

“The market is down about 30%,” he said. “We could still go down a lot further in gold prices and still leave intact the secular bull market that began in the year 2000.”

“I don’t own enough gold but I do think it is a good thing to hold,” he added.

During his presentation, Boeckh used the example of an upside-down pyramid to describe the situation as a result of the current monetary policy. At the bottom is gold, which he referred to as “the ultimate bed rock of stability.”

“The pyramid builds … with decreasing quality as you go up,” he said. “When governments are inflating with money and credit, money goes up the pyramid and it gets bigger and bigger. Eventually it gets top heavy and it starts to get unstable.”

Workers laying the foundation for the new ball mill
Image courtesy of Tony Boeckh: During his presentation, Boeckh used an inverted pyramid to describe how loose monetary policy has caused money to flow away from gold and into lower quality investments. Boeckh said the pyramid will start to get unstable and a shot to the system should cause money to flow back down to the yellow metal.

Boeckh said gold has taken a hit this year because of the economy is improving in an “artificial environment.” Although private and household balance sheets have improved over the last few years, any improvement has been overshadowed by an increase in sovereign debt.

“Things are not looking so bleak,” he said. “The great reflation managed to pump some air into the balloon. The key question here is, how solid is that improvement?”

Because of increased public sector debt, Boeckh said he expects to see more bubbles in asset, commodity and energy markets.

“The key point to always keep in mind here is when you create a lot of money it has to go somewhere and it will go into asset markets,” he said.

Although the Federal Reserve is starting to talk about an exit strategy, Boeckh said because there is so much money in the system, when inflation starts to pick up it might be too late for them to try to control it. He said today central banks have an attitude that a bit of inflation is a good thing. He witnessed the same attitude when he worked at the Bank of Canada in the 1960s and quickly inflation reached 15%.

“We have to be aware of a little bit of inflation and whether it can be contained or not, especially when there is this backlog of so much central bank liquidity that has been put into the system,” he said.

Boeckh is an author of the book The Great Reflation; from 1968 to 2002, he was also chairman, chief executive and editor-in-chief of Montreal-based BCA Research. From 1968 to 1973 Boeckh taught economics and finance at McGill University in Montreal and in the early 1960s he worked for the Bank of Canada.

By Neils Christensen, of Kitco News nchristensen@kitco.com

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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