Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
UK Covd-19 FREE Lateral Flow Self Testing Kits How Use for the First Time at Home - 10th Apr 21
NVIDIA Stock ARMED and Dangeorus! - 10th Apr 21
The History of Bitcoin Hard Forks - 10th Apr 21
Gold Mining Stocks: A House Built on Shaky Ground - 9th Apr 21
Stock Market On the Verge of a Pullback - 9th Apr 21
What Is Bitcoin Unlimited? - 9th Apr 21
Most Money Managers Gamble With Your Money - 9th Apr 21
Top 5 Evolving Trends For Mobile Casinos - 9th Apr 21
Top 5 AI Tech Stocks Investing 2021 Analysis - 8th Apr 21
Dow Stock Market Trend Forecast 2021 - Crash or Continuing Bull Run? - 8th Apr 21
Don’t Be Fooled by the Stock Market Rally - 8th Apr 21
Gold and Latin: Twin Pillars of Western Rejuvenation - 8th Apr 21
Stronger US Dollar Reacts To Global Market Concerns – Which ETFs Will Benefit? Part II - 8th Apr 21
You're invited: Spot the Next BIG Move in Oil, Gas, Energy ETFs - 8th Apr 21
Ladies and Gentlemen, Mr US Dollar is Back - 8th Apr 21
Stock Market New S&P 500 Highs or Metals Rising? - 8th Apr 21
Microsoft AI Azure Cloud Computing Driving Tech Giant Profits - 7th Apr 21
Amazon Tech Stock PRIMEDAY SALE- 7th Apr 21
The US has Metals Problem - Lithium, Graphite, Copper, Nickel Supplies - 7th Apr 21
Yes, the Fed Will Cover Biden’s $4 Trillion Deficit - 7th Apr 21
S&P 500 Fireworks and Gold Going Stronger - 7th Apr 21
Stock Market Perceived Vs. Actual Risks: The Key To Success - 7th Apr 21
Investing in Google Deep Mind AI 2021 (Alphabet) - 6th Apr 21
Which ETFs Will Benefit As A Stronger US Dollar Reacts To Global Market Concerns - 6th Apr 21
Staying Out of the Red: Financial Tips for Kent Homeowners - 6th Apr 21
Stock Market Pushing Higher - 6th Apr 21
Inflation Fears Rise on Biden’s $3.9 TRILLION in Deficit Spending - 6th Apr 21
Editing and Rendering Videos Whilst Background Crypto Mining Bitcoins with NiceHash, Davinci Resolve - 5th Apr 21
Why the Financial Gurus Are WRONG About Gold - 5th Apr 21
Will Biden’s Infrastructure Plan Rebuild Gold? - 5th Apr 21
Stocks All Time Highs and Gold Double Bottom - 5th Apr 21
All Tech Stocks Revolve Around This Disruptor - 5th Apr 21
Silver $100 Price Ahead - 4th Apr 21
Is Astra Zeneca Vaccine Safe? Risk of Blood Clots and What Side Effects During 8 Days After Jab - 4th Apr 21
Are Premium Bonds A Good Investment in 2021 vs Savings, AI Stocks and Housing Alternatives - 4th Apr 21
Penny Stocks Hit $2 Trillion - The Real Story Behind This "Road to Riches" Scheme - 4th Apr 21
Should Stock Markets Fear Inflation or Deflation? - 4th Apr 21
Dow Stock Market Trend Forecast 2021 - 3rd Apr 21
Gold Price Just Can’t Seem to Breakout - 3rd Apr 21
Stocks, Gold and the Troubling Yields - 3rd Apr 21
What can you buy with cryptocurrencies?- 3rd Apr 21
What a Long and Not so Strange Trip it’s Been for the Gold Mining Stocks - 2nd Apr 21
WD My Book DUO 28tb Unboxing - What Drives Inside the Enclosure, Reds or Blues Review - 2nd Apr 21
Markets, Mayhem and Elliott Waves - 2nd Apr 21
Gold And US Dollar Hegemony - 2nd Apr 21
What Biden’s Big Infrastructure Push Means for Silver Price - 2nd Apr 21
Stock Market Support Near $14,358 On Transportation Index Suggests Rally Will Continue - 2nd Apr 21
Crypto Mine Bitcoin With Your Gaming PC - How Much Profit after 3 Weeks with NiceHash, RTX 3080 GPU - 2nd Apr 21
UK Lockdowns Ending As Europe Continues to Die, Sweet Child O' Mine 2021 Post Pandemic Hope - 2nd Apr 21
A Climbing USDX Means Gold Investors Should Care - 1st Apr 21
How To Spot Market Boom and Bust Cycles - 1st Apr 21
What Could Slay the Stock & Gold Bulls - 1st Apr 21
Precious Metals Mining Stocks Setting Up For A Breakout Rally – Wait For Confirmation - 1st Apr 21
Fed: “We’re Not Going to Take This Punchbowl Away” - 1st Apr 21
Mining Bitcoin On My Desktop PC For 3 Weeks - How Much Crypto Profit Using RTX 3080 on NiceHash - 31st Mar 21
INFLATION - Wage Slaves vs Gold Owners - 31st Mar 21
Why It‘s Reasonable to Be Bullish Stocks and Gold - 31st Mar 21
How To Be Eligible For An E-Transfer Payday Loan? - 31st Mar 21
eXcentral Review – Trade CFDs with a Customer-Centric Broker - 31st Mar 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Gold Prices After The End of QE

Commodities / Gold and Silver 2014 Dec 22, 2014 - 01:05 PM GMT

By: Arkadiusz_Sieron

Commodities

The performance of gold obviously depends on the U.S. economic condition and the Fed's future actions. In the short run, the end of QE3 will most likely not change anything and gold will most likely decline on a dollar rally. It is likely to last as long the U.S. central bank credibility is at all-time heights. This is because gold can be seen as the reciprocal of central bank credibility. Thus, when central bank credibility is at a peak, gold is in the dumps. The end of QE3 could even strengthen the belief about the strength of the U.S. economy. After all, Fed would not halt the quantitative easing if the economy was not strong, right? Just look at the economic numbers, say the pundits. Unemployment went down, while GDP grew faster than expected in the third quarter, and oil is historically cheap, which will additionally boost the U.S. economy.


Moreover, in contrast to the Fed, the Bank of Japan announced on October 31, 2014 a new round of QE in Japan. It implies more quantitative and qualitative easing, because the BoJ will purchase not only bonds, but also real estate investment trusts and exchange-traded trust tracking the Japanese stock market. The European central bank also stated that it will start to purchase asset-backed securities to increase its balance sheet to 1 trillion euro by 2016. Therefore, despite still expansionary monetary policy, the U.S. dollar will likely be gaining compared to other main currencies, depressing the gold price (in terms of the USD).

However, the end of QE3 could mean a market bust. Most likely not today, nor tomorrow. The effects of changes in monetary policy come with a significant delay. Perhaps, the money supply is not yet decelerating at a rate comparable to the rates we saw in the latter stages of the previous two boom-bust cycles, but today's economy is much more fragile than earlier. Every confidence-shaking event can unsettle markets. Remember how the markets reacted when Bernanke suggested tapering? The same panic attack was observed in October, because of the expected halt of QE3. The correction was on the way, but then James Bullard, the president of the Federal Reserve Bank of St. Louis, said that the Fed could be back with QE4, if needed. He was supported by Eric Rosengren, the president of the Federal Reserve Bank of Boston, who later said that he could easily imagine not raising rates until 2016.

The message is clear: do not take the end of QE too seriously. It is not the permanent abandon of quantitative easing, which may be restored at any time depending on the economic situation. The hike of interest rates is also an open case. Gold is not lost. On the contrary, all the fuss about the future of the Fed's action can only increase the nervousness in the financial markets, supporting the gold price.

But even if the Fed increases interest rates, the result will not necessarily be negative for the yellow metal. Generally, as we have explained in one of the previous editions of Market Overview, the gold price is inversely related to the real interest rates. Although true, our explanation omitted the impact of the interest rates hike on the asset market. In equilibrium the price of the asset is equal to the present value of the discounted stream of payments.

Therefore, the rise of interest rates will be detrimental to asset prices and, consequently, positive for the gold price. The reason is simple: gold tends to perform relatively well during the busts and relatively poorly during the booms (at least if we take the last 3 years into account). This relationship does not always hold because of the influence of changes in the U.S. dollar value and many secondary issues, but the inverse correlation between gold and U.S. stocks is well established in the case of the last 3 years, so we can expect it to be present in the case of the next medium-term trend. We can justify this negative relationship in the following way: in case of panic in the stock market, investors shift their capital into the ultimate safe haven - gold. Just recall 2011 when U.S. stocks went through a sharp sell-off and the gold price reached its record high.

Graph 1: Gold price (red line, right scale) and SP500 Index (green line, left scale) from 2009 to 2014

Gold and S&P500 price Charts

The bottom line is that the end of QE3 is not the abandonment of the quantitative easing concept and expansionary monetary policy with extremely low interest rates. An interest rates hike could be detrimental for the asset markets and accelerate the bursting of the stock bubble. However, the halt of QE3 and all this talk about the normalization of monetary policy could increase Fed's credibility. Therefore, as data on the U.S. economy looks positive, at least compared to Japan and Europe, the greenback will be gaining, which could easily translate into lower prices of the yellow metal. However, the seeds of the next bust have been already sown, so investors should wait and watch for downside risks, especially the slow global economic growth (look at data on China) and the decelerating pace of money supply expansion in many countries. Both factors have actually busted the oil boom. The stock market may be next, which would increase gold prices.

Stay updated on the latest developments in the Fed's policy, gold market and US economy by signing up for our Market Overview reports. We also provide Gold & Silver Trading Alerts for traders interested more in the short-term prospects. If you're not ready to subscribe now, we still encourage you to join our gold newsletter. It's free and you can unsubscribe in just a few clicks.

Thank you.

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.


© 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