Counterintuitively, gold prices fell on the quite bullish news, in marked contrast to the sharp falls gold saw on the mere rumour of small Cyprus selling their miniscule gold reserves. Such odd trading leads to continuing concerns that the precious metals markets are still being manipulated.
Over the last couple of months, the ECB has launched several measures to revive the lackluster eurozone economy. Mersch said the bank should let these steps take effect first before considering more action.
If more action was needed, the ECB's hands wouldn't be tied as it could theoretically purchase government bonds or other assets such as gold, shares, or exchange traded funds (ETFs).
But he said the bank was not determined to buy up assets come what may and should consider its actions carefully. He warned about the negative side effects were the central bank to start buying up government debt, urging political leaders instead to reform their economies to boost growth.
"Easing of monetary policy cannot work effectively when the European economy is structurally not in good shape," Mersch said in a speech at an annual banking conference in Frankfurt.
There appears to be an ongoing tussle between the ultra dovish such as ECB President, Mario Draghi and the slightly less dovish members of the ECB.
Mario Draghi has explicitly cited government bond buying as a policy tool officials could use to further stimulate the economy should the outlook worsen again.
“Unconventional measures might entail the purchase of a variety of assets, one of which is sovereign bonds,” the ECB president said in Brussels yesterday in answer to a question during his quarterly testimony to lawmakers at the European Parliament.
Draghi and the uber doves appear determined to ignore the failure of QE in both the U.S. and Japan.
The architect of Japan's radical economic policies - ‘Abenomics’ - Koichi Hamada has described the recent bond buying binge by the Japanese central bank as a ponzi scheme:
“In a Ponzi game you exhaust the lenders eventually, and of course Japanese taxpayers may revolt. But otherwise there are always new taxpayers, so this is a feasible Ponzi game, though I'm not saying it's good.”
Japan's GDP tanked an incredible 7.4% last quarter and social tensions are rife. Like in the U.S., the primary beneficiaries of Japan's ultra-loose monetary policies have been speculators, investors and the ultra-rich - the Nikkei has been booming - or bubbling.
Meanwhile, Japan has hit the panic button with President Abe directing his cabinet to formulate policies such as printing up "gift certificates" for the poor to "support personal consumption directly."
Against this backdrop Yves Mersch, from the ECB's executive board, made an astounding observation regarding Abenomics:
"I’m not so sure it has worked, considering that this morning we saw that Japan has officially slid into recession again."
In a speech in Frankfurt, Mr. Mersch made a suggestion which may be seen as an acceptable compromise by Germany with regard to monetary expansion to stoke inflation.
He said "Theoretically the ECB could purchase other assets such as gold, shares, ETFs to fulfill its promise of adopting further unconventional measures to counter a longer period of low inflation."
Germany have been resolutely opposed to monetary expansion through the purchase of debt, but asset backed money printing may be regarded as more palatable.
The suggestion that gold would be used, even in a limited way, to back the Euro, is encouraging. Western central banks' public utterance regarding gold is usually negative.
Physical gold supply remains extremely tight. Gold is currently in backwardation, meaning that the price on the futures market is lower than the spot price today.
If holders of physical gold bullion sold it today, they could profit by buying a forward contract which would guarantee them the same volume of gold but at a lower price in the future, avoiding storage costs in the interim period and using the proceeds of the sale to invest until that later date.
Investors are not taking advantage of this opportunity probably because some are concerned that there will not be physical gold available at the lower price which may cause the counterparty to the trade to default.
It appears as though the trepidation of gold investors may sometime come to an end. That the ECB would even consider buying gold in QE may come to be seen as an important moment.
If the Swiss people vote to pass the gold initiative at the end of this month it is likely that the ECB will feel pressure to enter the market sooner than they may have expected.
As the currency wars continue it may be that other western central banks will feel compelled to enter the gold market to protect their currencies from speculative attack and devaluation.