Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Gold, QE, The Federal Reserve and Janet Yellen

Commodities / Gold and Silver 2014 Feb 27, 2014 - 12:31 PM GMT

By: Bob_Kirtley


The Federal Reserve
The formulation of any investment strategy requires the investor to be well aware of the big picture which includes an understanding of the wider economic and political environment. One of the major elements to be considered is the various actions being implemented by our politicians and the central banks. One such central bank is The Federal Reserve who controls the money supply in the United States. 

The Federal Reserve was formed after its supporters paid for the presidential campaign of US President, Woodrow Wilson. President Wilson went on to sign the bill that transferred the control of US currency to twelve regional private banks.

The very same President Wilson later regretted his decision saying the following: 

“I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the civilized world. No longer a government by free opinion, no longer a government by conviction and the vote of the majority, but a government by the opinion and duress of a small group of dominant men.”  

So here we are decades later and the Fed has more power than ever before. They can turn the liquidity tap on and off as they see fit; as evidenced by Ben Bernanke’s introduction of Quantitative Easing, which involved the buying of mortgage-backed securities, and Treasury notes. This form of stimulus has been increased to tune of 4 trillion dollars being added the Feds balance sheet over the last few years.

Chart the Federal Reserve Balance sheet 22 Feb 2014

As Ben Bernanke approached the end of his tenure he introduced ‘tapering’ which is a slow, but steady reduction in the amount of buying the Fed will do on a monthly basis. This decision is largely based on then perception that the US economy is improving, unemployment is falling and inflation is heading towards its ‘Fed set’ target area. Ben Bernanke has now departed and handed the Chair to Janet Yellen.

Janet Yellen 

If we take a quick look at Janet Yellen’s resume we can see that there isn’t a mention of real job anywhere on it. This is a person whose career consists of school, university and more university, a pure academic who has spent a lifetime acquiring many academic accolades from within the academic institutions

This lady has no experience whatsoever in working or running a real business as she has never ventured into the world of private enterprise. Her theories are just that; theories, backed by not one once of experience. I must admit that it scares the life out of me to think that we can place such an inexperienced person into such a powerful position where her actions, or lack of them, will affect every single one of us.

Quantitative Easing (QE) 

The introduction of QE has provided the market with boat loads of liquidity in an attempt to ensure that there was enough money in the system to oil the wheels of industry, recapitalize the banks and provide financial stimulus to both Wall Street and Main Street. The effect of this stimulus has been to boost the stock markets to all-time highs. Unemployment is coming down, according to government figures, although others would dispute this. Inflation has moved higher, although without much conviction. At this point we ought to be aware that money knows no boundaries so some of these newly manufactured dollars have flowed out of the US and into foreign markets. The additional liquidity has provided easy money to their banking systems and their financial markets, for better and for worse.

However, the Fed is now of the opinion that this infusion of cash has served its purpose and so a programme of reducing this stimulus is now in place and is commonly referred to as tapering. The Fed will continue to monitor inflation and the employment figures; should both be considered to be making satisfactory progress then tapering will continue. However the last two monthly reports on employment showed that the creation of new jobs had fallen short of expectations and should this become a trend then the Fed could well suspend tapering and if considered necessary they could reintroduce QE. The ramifications of such an action are too numerous to mention today, but as a gold and silver bug I will take a quick look at what could be in store for this tiny precious metals sector.


The introduction of money printing and especially the implementation of QE greatly inflated the money supply and to a large extent provided the oxygen that gold needed to rally to its all-time high of $1900/oz, or so. Gold peaked and then started to fall until QE3 was announced in 2012 which saw gold rally once more to around $1800/oz. Since then it would appear that ‘The Law of Diminishing Returns’ comes into play as gold drifted lower, all the way down to $1180/oz in June of 2013. At this point gold prices rallied to around $1400/oz before falling back to retest the June lows of $1180/oz in December 2013. Gold stayed above the June lows and rallied to where it stands today at $1329/oz. It is interesting to note that gold appears to have ignored the introduction of tapering and the planned reduction of its oxygen supply. This is knife edge stuff as gold may have disconnected itself from the actions of the Fed, QE and tapering and may well be behaving in accordance with traditional drivers such as supply and demand.

It is a tad too early for us to say that this is in fact the case as tapering is in its embryotic phase and should it continue through 2014 then gold’s ability to rally could be capped. At the moment we cannot over stress the importance of the Fed and its implementation of monetary policy.

If we now take a quick look at the miners we can see that they have had a torrid time over the last few years. The Gold Bugs Index, the HUI, has fallen from a high of 625 in 2011 to today’s level of 240 registering a very painful loss of 61%. If we look at 2013, the HUI fell from a January figure of 430 to 200 in December 2013 registering a loss of 53% as the chart below shows:

Chart courtesy of StockCharts

Note that the technical indicators are a bit on the high side suggesting that a pullback might be on the cards.

Now, if we had purchased a gold mining stock for $100.00 in January 2013 by the end of the year it would be worth just $47.00. The average rise in gold stocks in 2014 is 20%, so our acquisition would now be worth $56.40, hardly a cause to break out the champagne.

We have witnessed a number of false dawns over the last few years and this could well be another one. For this rally in gold to be the real deal we would like to see gold form a higher high, which requires gold prices to trade above $1360/oz.

We would also like to silver prices to move up in support of gold however, silver’s rally has hit resistance at $22.00/oz, failing to form a higher high which requires silver to trade above $22.50/oz.

In conclusion we need to see more in the way of all round strength in this sector before we can implement an aggressive acquisitions strategy and so we have the lion’s share of our portfolio in cash.

However, allocating a small amount of your investment funds to the acquisition of a few good quality gold and silver stocks in order to have a one foot in the precious metals camp might not be a bad idea, but go very gently as these are dangerous times for gold bugs.

Got a comment, fire it in, especially if you disagree, the more opinions that we have, the more we share, the more enlightened we become and hopefully the more profitable our trades will be.

Take care.  

Bob Kirtley

To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. Winners of the GoldDrivers Stock Picking Competition 200

DISCLAIMER : Gold Prices makes no guarantee or warranty on the accuracy or completeness of the data provided on this site. Nothing contained herein is intended or shall be deemed to be investment advice, implied or otherwise. This website represents our views and nothing more than that. Always consult your registered advisor to assist you with your investments. We accept no liability for any loss arising from the use of the data contained on this website. We may or may not hold a position in these securities at any given time and reserve the right to buy and sell as we think fit.

Bob Kirtley Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules