Precious metals: The effect of QE tapering on gold and silver

This post comes from Keith Guyot at our partner site Zing.

Gold prices fell more than 25% from January 2013 to January 2014, according to Silver was down nearly 36% in that same time period. Meanwhile the Federal Reserve’s balance sheet ballooned from $3 trillion to $4 trillion in 2013, and has grown nearly fivefold since the beginning of the recession in 2008.

Myriad Federal Reserve policies have come and gone in the past decade. A vast majority of them either had no effect on precious metal prices or positively influenced them. It was late May 2013 when the Federal Open Market Committee began hinting it would taper QE3. The precious metal market reacted to the news accordingly, with gold rising from about $1, 192 per ounce in June to nearly $1, 400 by July.

The FOMC quickly scuppered its QE tapering plans based on disappointing summer unemployment numbers. By December, gold subsequently lost all it had gained in those two summer months. But gold is now up again by $48, or 4%, as of January 20, as the FOMC officially announced a $10 billion per month reduction in QE starting in January 2014. And it appears this trend will continue throughout 2014 as long as QE tapering continues.

Good Job Numbers Golden for Precious Metals

Some economists believe the Fed’s plan to taper QE3 may have to be cut short at some point in 2014. Peter Schiff, CEO of Euro-Pacific Capital, said via CNBC that the Fed must keep “spiking the punch bowl” because it cannot remove it completely without “ending the party.” But as long as the unemployment rate continues to fall, the Fed is comfortable with tapering.

Unemployment dipped to 6.7% by December 2013, the lowest reading since October of 2008, according to the Bureau of Labor Statistics. Steven Cochrane, managing director of bank stress testing and economic forecasting firm Moody’s Analytics, told Pew Charitable Trusts that jobless rates across the four main regions of the U.S. are as low as they’ve been since before 2008. The Fed expects unemployment to hit the magic 6.5% mark well before summer.

Gold A Commodities Exception

The prices of several commodities, including soy beans, sugar and copper, have hit all-time record highs at some point since QE1 commenced in November of 2008. Gold is no exception, peeking at $1, 889.70 in the second half of 2011. QE has increased the money supply substantially and has also artificially inflated commodities prices along with it.

Gold has always been viewed as an inflation hedge for investors. As the housing bubble blew up in the mid-2000s, so did the price of gold. The difference today is that several other large banking institutions (Bank of England, People’s Bank of China, Bank of Japan et al.) have also adopted quantitative easing policies. The U.K. plans to continue its QE unchanged, while Japanese Prime Minister Shinzo Abe plans to expand his country’s initiatives.

A global correction cannot happen with gold until all asset purchase programs are ceased. Regardless, the $1252 per ounce price on January 20 will likely look like a bargain by summer.

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One Response to “Precious metals: The effect of QE tapering on gold and silver”

  1. Anonymous

    Interesting post. Maybe it’s time to start buying Gold options for the long term. This market is becoming more and more bullish and it’s soon going to pop in my opinion. Gold is a good hedge as well as SPY Puts of VIX calls.

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