The Gold fear trade is back on.  That is, traders and investors fear they are not long enough.  The Bank of Japan really got the party started as Bloomberg reports,

“The unexpected decision by the Japanese central bank yesterday to drop its interest rate to “virtually zero” and expand its balance sheet follows the U.S. Federal Reserve’s move toward more unconventional easing. Bank of England officials will consider further stimulus tomorrow, while the central banks of Australia, Canada and New Zealand are among those now holding fire on further interest-rate increases.”

With almost all assets and commodities moving higher,  loose monetary conditions are starting to bite and we wouldn’t be surprised that credit expansion is partially behind the recent melt-up.

Note, emerging market central banks are also effectively “printing money” to purchase the excess dollars showing up in their foreign exchange markets in order to prevent rapid currency appreciation.  Sterilization,  or mopping up, the excess liquidity is not always fully effective and can lead to inflationary pressures and local asset bubbles.

There we have it.  Classic asset market monetarism — “too much money chasing too few assets/commodities.”    No wonder John Paulson is long gold,

“John Paulson, the hedge fund magnate who rose to fame for shorting securities tied to the housing market prior to the financial crisis of 2008, recently expressed his bullish outlook for the gold price…In a speech at the University Club in New York City, Paulson provided his broad outlook on several areas of the financial markets – including stocks, bonds, real estate, the Federal Reserve, and the price of gold...Given his expectation for further money printing by the Fed – and that in 1980 the gold price rose by 100% more than the correlation implied – Paulson noted that the price of gold could hit $2,400 based only on monetary expansion, and as high as $4,000 per ounce based on a projected overshoot.  Lastly, he noted that 80% of his assets are denominated in gold – a strong indication of his disdain for fiat currencies.  – Gold Alert