Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Silver Springboards Higher – What’s Next? - 26th May 20
Stock Market Key Resistance Breakout Is Where the Rubber Meets the Road - 26th May 20
5 Ways To Amp Up Your CFD Trading Today - 26th May 20
The Anatomy of a Gold Stock Bull Market - 26th May 20
Stock Market Critical Price Level Could Soon Prompt A Big Move - 25th May 20
Will Powell Decouple Gold from the Stock Market? - 25th May 20
How Muslims Celebrated EID in Lockdown Britain 2020 - UK - 25th May 20
Stock Market Topping Behavior - 24th May 20
Fed Action Accelerates Boom-Bust Cycle; Not A Virus Crisis - 23rd May 20
Gold Silver Miners and Stocks (after a quick drop) Ready to Explode - 23rd May 20
3 Ways to Prepare Financially for Retirement - 23rd May 20
4 Essential Car Trade-In Tips To Get The Best Value - 23rd May 20
Budgie Heaven at Bird Land - 23rd May 20
China’s ‘Two Sessions’ herald Rebound of Economy - 22nd May 20
Signs Of Long Term Devaluation US Real Estate - 22nd May 20
Reading the Tea Leaves of Gold’s Upcoming Move - 22nd May 20
Gold, Silver, Mining Stocks Teeter On The Brink Of A Breakout - 21st May 20
Another Bank Bailout Under Cover of a Virus - 21st May 20
Do No Credit Check Loans Online Instant Approval Options Actually Exist? - 21st May 20
An Eye-Opening Perspective: Emerging Markets and Epidemics - 21st May 20
US Housing Market Covid-19 Crisis - 21st May 20
The Coronavirus Just Hit the “Fast-Forward” Button on These Three Industries - 21st May 20
AMD Zen 3 Ryzen 9 4950x Intel Destroying 24 core 48 thread Processor? - 21st May 20
Dow Stock Market Trend Analysis and Forecast - 20th May 20
The Credit Markets Gave Their Nod to the S&P 500 Upswing - 20th May 20
Where to get proper HGH treatment in USA - 20th May 20
Silver Is Ensured A Prosperous 2020 Thanks To The Fed - 20th May 20
It’s Not Only Palladium That You Better Listen To - 20th May 20
DJIA Stock Market Technical Trend Analysis - 19th May 20
US Real Estate Showing Signs Of Covid19 Collateral Damage - 19th May 20
Gold Stocks Fundamental Indicators - 19th May 20
Why This Wave is Usually a Market Downturn's Most Wicked - 19th May 20
Gold Mining Stocks Flip from Losses to 5x Leveraged Gains! - 19th May 20
Silver Price Begins To Accelerate Higher Faster Than Gold - 19th May 20
Gold Will Soar Soon; World Now Faces 'Monetary Armageddon' - 19th May 20
Gold Mining Stocks Fundamentals - 18th May 20
Why the Largest Cyberattack in History Will Happen Within Six Months - 18th May 20
New AMD Ryzen 4900x and 4950x Zen3 4th Gen Processors Clock Speed and Cores Specs - 18th May 20
Learn How to Play the Violin, Kids Activities and Learning During Lockdown - 18th May 20
The Great Economy Reopening Gamble - 17th May 20
Powell Sends a Message With Love for Gold - 17th May 20
An Economic Renaissance Emerges – Stock Market Look Out Below - 17th May 20
Learn more about the UK Casino Self-exclusion - 17th May 20
Will Stocks Lead the Way Lower for Gold Miners? - 15th May 20
Are Small-Cap Stocks (Russell 2k) Headed For A Double Dip? - 15th May 20
Coronavirus Will Wipe Out These Three Industries for Good - 15th May 20
Gold and Silver: As We Go from Deflation to Hyperinflation - 15th May 20

Market Oracle FREE Newsletter

Coronavirus-stocks-bear-market-2020-analysis

The End of Quantitative Easing and Gold

Commodities / Gold and Silver 2018 Jul 06, 2018 - 01:17 PM GMT

By: Arkadiusz_Sieron

Commodities

June was hot for the central banks. The Federal Reserve lifted the federal funds rate for the second time this year, while the European Central Bank announced that it would end its bond purchase program by the end of 2018. It would mean another step towards normalization of the crisis-era monetary policy, which would end quantitative easing on both sides of the Atlantic Ocean. What do these important developments imply for the gold market?

On June the 13th, the Fed raised interest rates for another 25 basis points. It was the second hike in 2018 and the seventh in this tightening cycle. The move was widely expected, so it did not shake the markets. However, the Fed’s statement was more hawkish than anticipated, as the U.S. central bank suggested two more rate hikes this year.


The next day, on June the 14th, the ECB released its timid monetary policy statement, followed by Draghi’s press conference, which contrasted with the Fed’s decisively hawkish stance. It was interpreted as dovish, because it stated that the quantitative easing program would end only at the end of the year. Moreover, the ECB promised that there will be no hikes in interest rates at least through to the summer of 2019. Thus, Draghi announced the end of the asset purchase program, but with a dovish flavor.

Indeed, the Governing Council downgraded its Eurozone growth forecast from 2.4 percent previously to 2.1 percent, emphasizing the rising risks to the outlook. “This decision has been taken in the presence of a strong economy with increasing uncertainty”, said Draghi.

However, somewhat counterintuitively, gold gained in the immediate response to the Fed’s hawkish announcement and the ECB’s dovish meeting. In a sense, it shouldn’t be surprising at all, as “sell the rumor, buy the fact” used to be dominant strategy during this tightening cycle: the yellow metal weakened prior to the Fed’s meetings, but rallied afterwards.

But the fact that gold prices were able to rise for a while amid the surge in the greenback is significant and requires a more detailed examination. We offer two points about this unusual development. First, the ECB’s stance is actually not as dovish as some analysts interpret it. Why? Remember the Fed’s tapering? The U.S. central bank announced it in December 2013, not providing any specific ending. In contrast, the ECB put a specific end-date on its stimulus, which could be considered a more decisive step compared to Fed. Moreover, Draghi downplayed the turmoil in Italy, although some analysts forecasted that turbulence on the Apennine Peninsula could force the ECB to adopt a more cautious approach. But it didn’t happen. Draghi said that “contagion was not significant, if any, if at all, so it was a pretty local episode and so we haven’t seen the redenomination risk.”

Second, it might be the case that the well-established negative correlation between the greenback and the shiny metal has somewhat weakened, allowing gold to stay afloat or even climb amid strengthening dollar. Let’s look at the chart below, which paints the gold prices and the broad dollar index. As one can see, the dynamic of one asset looked like the mirror image of the other until May – but then something happened and the correlation has weakened since.

Chart 1: Gold prices (yellow line, left axis, London P.M. Fix, in $) and U.S. dollar index (red line, right axis, broad trade weighted index).

What has happened? Well, as we explained in the November 2014 edition of the Market Overview, greenback and gold sometimes move in tandem and it’s nothing special. It usually happens when investors fear about the future of the Eurozone and the euro.

However, there is another possible explanation: with the Fed’s hike behind it, gold investors look now at heightened market volatility and rising inflation explanations (see the chart below, which paints the CBOE VIX index and the measure of a measure of expected inflation derived from 5-Year Treasury Constant Maturity Securities and 5-Year Treasury Inflation-Indexed Constant Maturity Securities). Both of them have been rising in June.

Chart 2: CBOE VIX (green line, right axis) and 5-Year Breakeven Inflation Rate (red line, left axis, in %) in 2018.

Another issue is that gold investors are forward-looking. The Fed has just hiked interest rates seventh time since December 2015. So it is quite deep into a tightening cycle, with rather limited room for U.S. rates to move substantially higher relative to the Eurozone. The federal funds rate stands now at 1.75-2 percent, while its longer-run estimations show 2.9 percent level, which implies just four more hikes. In contrast, the ECB has only announced to wind down its bond-buying program and it will not lift its interest rates before the summer 2019. Hence, the ECB is likely to start hiking when the Fed will run out of steam. It might be fundamentally bullish for the euro and possibly for gold as well in the medium term, however a lot will depend on the market sentiment.

If you enjoyed the above analysis and would you like to know more about the gold ETFs and their impact on gold price, we invite you to read the April Market Overview report. If you're interested in the detailed price analysis and price projections with targets, we invite you to sign up for our Gold & Silver Trading Alerts . If you're not ready to subscribe at this time, we invite you to sign up for our gold newsletter and stay up-to-date with our latest free articles. It's free and you can unsubscribe anytime.

Arkadiusz Sieron
Sunshine Profits‘ Market Overview Editor

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Arkadiusz Sieron Archive

© 2005-2019 http://www.MarketOracle.co.uk - 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