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.
This post was published at GoldSeek on 22 December 2014.
Follow on Twitter
Recent Comments