How Quantative Easing Affects Gold

January 8, 2015 | By | Reply More

It is true to say that money printing a.k.a. Quantitative Easing has drawn easy money into the broad stock market at the detriment of popular commodities but to an extent and duration that has long been illogical. In particular we are considering how QE and other factors affects gold.

It could be argued that in simple terms the equation ‘increased money supply = increased inflation = rise in gold. For centuries this has proven true but no longer. At least in the immediate future. For now only short term profits on rising share prices holds sway. It cannot continue indefinitely.

QEs Push Shares Above True Value

Our reasoning is that the expected performance of popular listed companies at the share prices prevailing for the last twelve or so months bears little relationship to real life. The ever increasing tide of fresh money has flowed into the stock market simply because of the expectation that share prices will continue to increase while the cash mills keep churning it out.

Right now there seems to be a doubt among the few that perhaps this Fed inspired new money is not doing the job it was expected to do. That is to stimulate real growth in the economy, control inflation, increase job prospects and an increase in spending on consumer goods by Joe Public.

This failure is perhaps responsible for the volatility in share prices over the last few weeks but, no doubt, Ms Yellen and other government and Wall St. mouthpieces will reassure us that all is under control and hint that another round of QE by any another name will come to the rescue of shareholders and push prices up to further record levels. That is of course until it all becomes unsustainable and the ensuing crash will bankrupt all but the few forewarned and in the know.

Who will they be? Surprise, surprise.

The very people who have imposed this impending horror scenario upon us. The Fed, the Central Bankers, Wall Street brokers and compliant politicians. It is therefore no great surprise that the leader of this mess, the man that must ultimately carry the can, President Obama, is likely to be acknowledged as probably the worst US president of all time.

BRICS Continue Buying But Gold Doesn’t Move

Where does all this leave gold? Gold the enigma! Despite all the evidence of sustained gold buying by China, India and other so called third world countries still the price stays in the doldrums. Perhaps the most significant current buyer is Russia despite the the fall in the Rouble and the sanctions imposed upon that country.

Now, despite all the evidence of gold buying and hoarding by all but the Western democracies gold is unable to make progress above circa $1200 an oz. Lets be clear, the economies of the United States and Europe are in crisis and have been for six years. No amount of politically inspired propaganda can deny the fact that things have not got any better for Joe Public than they were when 2008 heralded the crash.

But still those non westernised economies buy gold. There seems only one viable reason and that is that they expect, and are working towards, the demise of the non asset backed US dollar as the worlds premier trading currency to be replaced by their own currencies underwritten by gold, the ages old store of value. The way things are going this is more likely to happen than not.

Think about the drop in oil prices engineered by the Saudis and its effect on the US dependency on oil. Knocking out the US shale producers that were about the only area of growth is only more likely to knock back the importance of the dollar.

Highly Leveraged Gold Futures Distorting the Market

Gold the enigma, and yes it is a riddle with many possible answers. Could it be that investors no longer have faith in the futures market reflecting the reality of golds’ importance. After all it is only highly leveraged and very speculative paper trading turning over far more trade than there is available bullion to meet the contracts if ever settlement was demanded.

Perhaps the detrimental publicity surrounding the gold holding ETFs undermined the confidence of many retail investors. Most likely it is the war of words emanating from those that publicly and loudly have consigned gold to the dust bin with no place in the modern financial landscape as they see it.

The Chinese, the Indians, the Russians, etc., don’t see it this way and they represent two, maybe three or more times the populations of Europe and the US. Much as we hate the thought our money is on them being right. Lest we forget there is the question of manipulation of the gold and silver markets by central banks. Look at the sharp drops and subsequent returns to the $1200 an oz level over the last quarter.

No Blame Attached to Gold Deserters

To sum up, gold is an enigma which does not seem have an answer, at least in the short term. Gold buffs cannot blame investors turning their backs on the yellow metal to chase and profit from seemingly ever increasing stock market prices. Now even treasury prices are benefiting, lower yields, higher prices as some doubt is gently percolating about stock prices and no prospects of an interest rate rise on the horizon.

Once upon a not so long ago time, this scenario would have resulted in a rise in gold prices. Could this second week of 2015 be a return to investors grasp of reality? Prices have moved as high as $1220 an oz., then a little profit taking leaving the price at around $2015 an oz.

There are statisticians, who so far have managed to get very little right in their forecasts for gold, beginning to read some positive signs in their charts. Maybe they will get it right this time. We should know by the end of next week whether there will be a sustained positive move in gold or whether it will continue to channel in the $1180 – $1210 range.

The positive sign is that there seems to plenty of buyers about under $1200 an oz. but who knows, it may be months, even years, until we stop getting blinded by the gold hating powers that be and gold returns to its true status as a store of value and the only true negotiable asset.

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