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« The nagging fear that QE itself may be causing deflation | Main | Eric Sprott: Connecting the Dots »

The Effect of Monetary Policy On Gold Prices 


Gold prices have fallen for 6 days in a row taking the price down to $1243/oz and it now stands about $60/oz above the 2013 June lows. Silver prices suffered the same fate falling from $19.50/oz to $18.75/oz. The gold producers as represented by the Gold Bugs Index the HUI is down to 204 which is lower than the 2013 June lows. We can look to the summer doldrums or the ‘sell May and go away’ investors when we try to account for these falls but the truth is that this tiny sector has been suffering for a couple of years now.

Many have called the bottom for gold as being the 2013 June low of $1180/oz which is something that we were skeptical about and remain so.

This lackluster performance usually comes to end around Labour Day in the United States which this year is on 1st September 2014 and so we have three months to endure baring a very serious Black Swan event.

There are a myriad of reasons that come into play which effect the direction of gold prices but today we will look at just one of them; the effect of monetary policy as perpetrated by The Federal Reserve and the European Central Bank (ECB) 

The Federal Reserve and the European Central Bank

The days of Quantitative Easing (QE) are drawing to an end as the Fed have introduced a strategy of tapering the amount of purchases they will make each month until the programme ends, which is anticipated to be towards the end of the year. In rough terms the objective of QE was to increase inflation, boost the economy, and create more jobs by way of a massive increase in liquidity. In terms of job creation the Fed are guided by the Non-Farm Payrolls Report which is issued on the first Friday of every month, at 8:30AM EST, the next one falling on 06 June 2014. Estimates suggest a figure of an additional 210,000 jobs will be added which will satisfy the Fed in that they are on the right course and so tapering will continue. Even if this number was very low, its only one month and I doubt if the Fed would change direction until they had a run of poor figures. The economy would need to tank for the Fed to re-introduce any form of financial stimulus, this is not out of the question but it’s certainly not in the frame to take place any time soon.

Following this key event the next one is the June 17-18 FOMC meeting where the Chairperson, Janet Yellen will give a press conference on the state of the economy, etc. We suspect that it will be a case of steady as we go and nothing in the way of dramatic change.

This is important as we see a link between tapering and the value of the dollar, as tapering progresses’ the dollar strengthens and has now climbed to its highest level in three months when measured against a basket of major currencies on the US Dollar Index. Not all of this gain can be attributed to the Fed, the actions of the ECB also play a part. Talk of a ‘refinancing rate’ reduction by the ECB this Thursday and the possibility of the deposit rate going into negative territory are taken its toll on the euro.

The decline of the euro helps to support the dollar and as gold is measured in dollars in many parts of the world its price has declined of late.


Among the many factors that we can point to as being influential for precious metals and we have covered just one of them, however this is an important week for both of them.

If on Thursday the ECB do reduce rates then the Euro could fall exerting upward pressure on the dollar which would be negative for gold. We also have the job numbers and if they are satisfactory then tapering will continue unabated which is having a positive effect on the dollar, so gold could have to endure a double whammy this week.

Either way it looks like being a volatile week for the markets.

A quick look at the chart and we can see that gold’s decline is accelerating so a re-test of the June lows now looks to be on the cards.

Finally we are keeping the lion’s share of our funds in cash until the investment environment for the precious metals sector improves. We know that this stance offers little in the way of excitement and many of our peers are super bullish, but acquisitions of gold, silver and mining stocks could be cheaper still given a little more time for this bear phase to exhaust itself.

Got a comment, fire it in, the more opinions that we have, the more we share, the more enlightened we become and hopefully our ‘well informed’ trades will generate some decent profits.


The miners have started 2014 very well indeed on the back of rising gold prices, so the question is; is this the real deal or another head fake? Is the bottom really in? Could there be a final capitulation just ahead of us? Will the summer doldrums take the PMs lower?

If you would like to know which stocks we are buying and selling please join us atStock Trader our premium investment service.


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