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.
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.
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.
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