-- Published: Thursday, 5 February 2015 | Print | Disqus
GOLD MARKET FLASH NOTE
Sometimes, but not always. Facts need to be filtered and interpreted through the screen of market beliefs. In 2010, the market believed that Quantitative Easing (translated commonly as money printing) would generate economic growth and consumer price inflation, so money printing was good for gold as well as stocks. More recently, the market has concluded that QE does not create price inflation. Therefore, QE is still regarded as good for stocks but not good for gold. We think this perception could change in the next few months, much to the advantage of gold.
Two key questions will be answered this year. (1) Will the Fed actually hike interest rates as promised? (2) Will the market finally begin to see that the Fedís serial promises of a real, sustainable economic recovery are bogus? We answer no to the first and yes to the second. The dollar is screaming higher, commodity prices are collapsing, credit spreads are widening and the long bond yield is dropping like a stoneÖnot exactly the best environment for US economic growth or rising interest rates. We expect more QE in response.
One more key question: Will financial markets embrace a Fed return to QE? Maybe not. If the Fed is forced to return to QE, thatís proof it doesnít work to stimulate economic recovery. Financial markets are already far less certain of QEís efficacy than in 2010. Yes, financial markets might well celebrate its return for a short period. But more than stimulus, financial markets at their current extreme valuations must continue to believe in a powerful and effective Fed that appears to know what it is doing. We donít think this religion can survive a new round of Fed QE with all that it implies. No rate hikes and more QE will destroy Fed credibility, in our view, and thatís all that is keeping financial markets up and gold down.
Those who think more QE must support stocks over gold should consider this: Despite $4 trillion of Fed easing since 2008, total inflation-adjusted stock market wealth is no greater today than it was at the 2000 mania peak. Meanwhile, the inflation adjusted market value of the worldís above ground gold supply is up nearly $5 trillion over the same period.