Ben Bernanke, head of the US central bank, will announce the beginning of the end for quantitative easing at this month’s policy meeting in Washington.
Everyone thinks so. Gold and silver prices seem to agree, drifting to new multi-week lows Wednesday morning in a reversal of their pattern when QE was ramped up from 2009 to 2012. And Bernanke pretty much said in June that QE’s end would start this month. Policy-makers have been talking about it since April.
Those two months loom large for anyone trading gold or silver. But looking at this week’s 4% drop so far, traders have to ask:
It was always the reverse when QE was growing. Acting in what we christened “quanticipation“, gold and silver prices tended to rise ahead of the US Fed’s various QE launches (you remember – QE1, QE2, and so on). They then fell back once the announcement was made, only to resume their longer-term rise.
So the outlook today? The aim of QE is to juice assets which might help boost the economy, or at least make it look that way. So since March 2009, the very depths of the post-Lehmans’ banking collapse, the Fed’s QE program has created and spent some $2.735 trillion by our maths. That’s greater than the sum total of all US cash and household savings in existence only 25 years ago. It’s equal to one Dollar in every four held by US savers today.
This flood of money, you’ll recall, has been used primarily to buy US Treasury bonds. The stated plan was to push up the price of “risk free” government debt investments, pushing down the interest rate they offer. That way, investors would be forced to make riskier bets if they wanted any hope of a decent return. Borrowers could then raise loans at cheaper rates, greasing the wheels of the economy.
Did it work?
US consumer debt is lower today by 12% from the peak of end-2008, just before QE began. That fall has been driven entirely by a drop in mortgage debt, despite a good chunk of the Fed’s electronic cash also going to buy mortgage-backed bonds as well as Treasury debt.
Wall Street’s own debt has meantime shrunk by one fifth, while corporate borrowing by non-financial firms has risen, but not by much when you account for inflation. What has soared, of course, is the stock market, with the S&P rising to all-time record highs as QE has been piled on QE.
As for interest rates, the best the Fed could say is that they didn’t soar. Yet. But rather than falling as advertised, 10-year US Treasury yields actually rose over the lifetime of QE1 (up from 2.42% to 3.85%). The start of QE2 saw 10-year yields rise almost one whole percentage point. Interest rates then hit rock-bottom – the very lowest in history – two months before the start of QE3.
So far, so bad. QE didn’t do what it was supposed to. Other than making the stock market jump. It also failed to raise the rate of inflation in consumer prices, which the Fed hoped would make the value of debt fall in real terms.
But what of debt’s opposite – physical bullion? Gold and silver are the most sensitive assets to monetary policy. Specifically, people buy silver and gold when they fear the value of money will fall. QE is plainly a campaign to drive money out of cash and lower-risk investments by creating so much of them – at will, from nowhere – that their value sinks. That has driven much of the last 5 years’ surge in gold and silver investment demand. So whether or not today’s QE tapering is already “priced in” by gold and silver’s 2013 plunge, the end of QE would, you might imagine, drive prices down further.
But note: Bernanke will still be running his electronic printing press after today’s Fed tapering statement and press conference. It’s just that, rather than printing $85 billion per month, the Federal Reserve will now create and spend perhaps $75bn or a little less. And from there, says the plan, new quantitative easing will only be slowly reduced. Finishing in 2014 is by no means certain.
Nor is this the first taper or pause in new QE flows. It’s only the first cut to the un-ending monthly program started 12 months ago. Nor will the trillions created to date be destroyed. That money is here to stay, albeit stuck at the Fed – where it was born – as excess reserves held by the banking sector. Gold and silver bears should watch their stop-losses if that cash ever leaches out into new bank lending. Zero interest rates on short-term money will also persist. And aggressive QE will now sit at the top of the Fed’s policy toolbox whenever it rolls up its sleeves and pops open the lid.
The world’s biggest central bank, in short, isn’t done with QE or zero rates yet. The rest of the world is applying the same “remedy” for the long ago financial crisis as well. No, the rate of inflation hasn’t leapt yet. But whatever noise today brings for gold and silver prices, the value of cash remains under attack by the very people charged with defending it.Courtesy: Adrian Ash at BullionVault
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