What Is The Link Between Gold And QE?

The intuitive response on the question what the link is between gold and QE is that QE (or “money printing”) is devaluing money and, consequently, appreciating the value of gold. That correlation became clear during the first two rounds of QE when the gold price more than doubled in dollar and euro terms in some 3 years and silver went three times higher.

However, QE3 resulted in the opposite effect. The chart shows how prices of key assets (stocks, bonds, commodities, gold) evolved between the start of QE3 and the start of tapering.

QE3_vs_asset_prices_2012_2013

Logically, the end of QE3 should be impacting gold in a positive way. The tapering of QE3 is a long process, which, so far, has resulted in a decrease of the bond and mortgage backed securities supply by the US Fed from 85 billion US dollar per month to 25 billion.

  • December 18th 2013: taper 10 billion to 75 billion US dollar per month
  • January 28th 2014: taper 10 billion
  • March 19th 2014: taper 10 billion
  • April 30th 2014: taper 10 billion
  • June 18th 2014: taper 10 billion
  • July 30th 2014: taper 10 billion

The next chart clearly shows how stocks have been suffering as the taper process progessed, while gold has been stable since the start of tapering.

QE3_tapering_vs_asset_prices_2013_2014

 

What to make out of this? It is clear that “money printing” as such does not correlate in a one-to-one way with precious metals, although it is, so far, higly correlating with stocks. During all the QE phases, stocks have been performing well, while gold has only benefited from QE1 and QE2 as those periods where associated by the market with inflation. On the other hand, QE3 provided THE ultimate “risk on” trade; because the invisible hand of the almighty central bank was there stimulate endless risk. That is when gold was literally ababonded, at least among Western investors.

The interesting part is that gold is today behaving as a “risk off” trade, sort of a “safe haven” trade.

What does this mean going forward? That’s hard to say, but the more likely answer is that the “safe haven” trade should continue. With multiple bubbles, including the ones in geopolitical tensions, ebola and currency wars, it is fair to expect a continuing safe haven bid. That would imply that gold investors would be relatively better off compared to silver investors, until inflation expectations return (e.g. because of monetary policy).

The next round of QE, whenever it would be announced, should be analyzed closely on the “set of circumstances” of that moment, as well as the resulting effect on market sentiment.

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