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« Broken Stocks, Battered Bullion, & Bruised Crude | Main | The Better Short: Gold or Silver? »
Monday
Oct272014

The End of QE and the Price of Gold

Background

The programme known as Quantitative Easing is due to be halted at the end of October, coinciding with the next meeting of the Federal Open Market Committee which is scheduled for 28/29 October 2014.  Monetary policy plays a big role in gold’s fortunes and so the strategies put in place by the central banks around the world need to be watched very carefully.

The Federal Reserve

St Louis Fed President James Bullard has suggested that tapering could be put on pause as inflation is not running as high as expected. However, he is only one member of the committee and we would expect the Fed to stay the course and end QE, it could then re-evaluate the situation with the data coming through towards the end of the year. The Fed has often said that their strategy is data driven and so far the jobs numbers, for instance, have achieved an acceptable level in their eyes. However inflation has not achieved the Feds target and the fear of deflation casts a dark shadow over the economy in the United States and across the world. The Fed has also stated that it will raise interest rates and it’s a question of when and not if; mid 2015 has been touted by some for the first increase. The problem arises when the economy falters, unemployment rises and inflation turns into deflation.

In the absence of a major event we would anticipate that the Fed will go ahead and end QE and will also talk in hushed words about the timing of an interest rate increase.

Gold

The end of QE and the talk of an interest rate rise will be supportive of the US dollar and inversely will put downward pressure on gold prices. This is just one factor that deserves consideration when trying to assess gold’s future movements. There are also a lot of other factors that go into this melting pot such as the slowing of the economies in Europe and what action Mario Draghi may take, the effect of the trade sanctions with Russia, the unrest in the Ukraine, the growing strength of ISIS, supply and demand, governmental restrictions on gold imports, etc.

The price of oil must also be kept in focus as it has fallen 20% in the last three months; which usually helps to curtail inflation and thus gold tends to trade lower.

Conclusion

Those of us who lived through the inflationary times of the late 70s and early 80s will remember just how high interest rates had to go before inflation was curbed. The base rate back then was around the 19% level prior to putting an end to gold’s historic rally.

So the point is that if and when the Fed decides to take action on interest rates then gold, silver and the associated mining stocks will take a tumble.

The Fed constantly reminds us that they are data driven and should the data turn soft then we could see the re-introduction of QE. This would indeed be the turning point that we have been waiting for and the catalyst, that just isn’t there at the moment, to ignite gold prices. Once we are sure that this sort of action is on the cards then we will hit the acquisition trail with some gusto. Until then we will continue to hold cash and trade to the short side.

It is important in these times not to be a ‘perma’ anything but to remain flexible and be able to trade in either direction at any given time.

In terms of timing; the summer doldrums have not been followed by a ‘fall’ boom for precious metals which in turn has caused more suffering for the mining sector. The Gold Bugs Index; the HUI has been a horror show losing 2/3rds of its value in the last 3 years as the chart below shows:

 

The HUI currently stands at 182 which is only 32 points above the low of 2008. Is it conceivable that the HUI could lose another 17% of its value? Absolutely and for those who have the cash this move down will present fantastic buying opportunities.

There are times to be fully invested and times to exercise a little caution. Right now we are not prepared to adopt a cavalier approach to investment in the precious metals or their associated producers as they have produced numerous of false dawns over the last few years and so we remain wary of them.

The next few days may give us an insight what the Fed have in store for us by way of monetary policy, which is in our view is the single most important element for gold bugs to watch.

Got a comment, fire it in, especially if you disagree, the more opinions that we have, the more we share, the more enlightened we become and hopefully the more profitable our trades will be.

 

Go gently.

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Reader Comments (8)

Sirs,
Read Grant Williams "Things that make you go Hmmm... and in it an article explaining the upcoming swiss gold referendum. It sees likely to pass, and require the Swiss to buy large quantities of physical gold. In your view, how should this upcoming referendum be factored into our positions in gold? I understand the vote is within the next month. Thanks,
Grant

October 28, 2014 | Unregistered CommenterGrant

Grant,

It will certainly good for gold prices if they vote Yes, however, just like Germany requesting the repatriation of their gold it hasn't been forthcoming, so it may take a number of years before their objective is achieved, if ever.

October 28, 2014 | Registered CommenterGold Prices

Grant, my first thought was also the Swiss vote. Since they are closer to Iceland than I am, they might recall the situation there better. If Iceland had 20% in gold there might not have been issues there. I have my doubts as to the medium term benefits to the price of gold. If they vote yes to all 3 parts, there might be a short term spike. Overall the world economy isn't looking good. Without QE4 the US can not stimulate further with interest rate cuts like last time. They will be out of ammo when the next great recession hits. QE4 will come too late. Damage is already done. I agree gold will spike then. The good ol days of options trading Rand will be back with major spikes.

October 29, 2014 | Unregistered CommenterRick

the HUI is close to the 2008 low--when gold futures bottomed at 681---yet now gold is 1200….in the gold mkt--tech analysis and divergences--bullish or bearish--are not reliably predictive….yet we can say PM stocks relative to spot gold are very cheap….that said, gold look friendless and weak as a kitten…regards Richard

October 30, 2014 | Unregistered CommenterRichard

Good article, and I think your point is well-taken that the slide in gold prices is not over.
I have (VERY prematurely) purchased some gold mining companies, primarily in early 2013 when I THOUGHT gold was stabilizing in the c. $1550-1750 range. I was obviously way off the mark.
Fat option premiums from covered calls blunted some of the losses, but I'm still in the red.
Huge misteps by ABX and others magnified the problem of much lower gold prices.
As tempting as it might be to buy some "bargain-priced" mining stocks, I'm holding off for now.
IF these companies are forced to deal with $800-1000 gold, there will be another big wave of selling and probably many mining corps. going under.

October 30, 2014 | Unregistered CommenterTom

Hello, Bob Kirtley,

First of all, thanks for all the articles that you and Sam post on kitco.com and 321gold.com. They are very
insightful and you have been ahead of the trend in the PM's, particularly the mining co stocks.

At this juncture,I don't agree with you in waiting for a catalyst to trigger purchases of these stocks because I don't believe
it makes sense to try to purchase all at the bottom, whenever that may be. (My guess is next spring to summer
Mar - Aug 2015). In any event, my firm belief is that the 2008 low of 150 on the HUI is not going to be exceeded
on the downside, but I always expect that I will be wrong so I have purchased some stock at these low
levels with long dated call sales to hedge. My time horizon is 3-5 yrs so I am not worried if gold goes to 1000 or
less and silver to 15 or less. As Jimmy Rogers would say, I hope if that happens that I will be smart / brave enough
to buy more then.
Thanks for all your help and feel free to send me a return or a free sample of your options letter if you have one

October 30, 2014 | Unregistered CommenterDavid

Sir,

Although the CPI was up less than 2%, surely you know that this was the contorted version of the real CPI, and, surely, the Fed. knows it! So, you count on end of printing press money for the time being. IF, and when, the stock market collapses, then the Fed will change its mind.
It just so happens that I just came to the net and saw your post. Now, I need to check the prices of gold and PM stocks.

October 30, 2014 | Unregistered CommenterSuresh

Team,

I'm glad that we have the lions share of our funds in cash on a day like this - the ending of QE has hit gold, silver and miners rather hard.

October 30, 2014 | Registered CommenterGold Prices

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