Sunday, January 6, 2013

Why hasn't Gold rallied after QE3 / QE4 announced?

A couple of weeks ago I wrote the following at the bottom of a post:
We are probably nearing another major bottom for Gold, I find it highly unlikely there is much more downside than $50 or so (e.g. could drop to the US$1620-1630 level, but unlikely to remain there long if it does).
I have seen a lot of comments about Gold not having rallied on QE3/QE4 announcements. Funnily enough it's this very expectation that's probably driving the price lower as those who took positions in Gold expecting a huge rally on the announcements exit in disappointment. Once the weak hands are cleared we will likely see an explosive rally in 2013.
Following the announcement of QE2 the price of Gold traded sideways to down before bottoming a couple of months later, then from the low point it rallied almost 50% in 7 months. I wouldn't be surprised to see a repeat performance from the recent or near future lows out of this correction (e.g. a move like $1600 to $2400 during 2013).
Since that post we've seen the price of Gold retrace to that $1620-1630 zone. It seemed a likely target for further downside given the previous resistance seen around that level during mid 2012:

Not to say there isn't the possibility of Gold heading lower, but the hammer candle on Friday does have the potential to form a significant bottom. The plunge in Gold was caused by doubt over the time that quantitative easing measures would be used by the Fed (FOMC Minutes):
Various members stressed the importance of a continuing assessment of labor market developments and reviews of the program’s efficacy and costs at upcoming FOMC meetings. In considering the outlook for the labor market and the broader  economy, a few members expressed the view that ongoing asset purchases would likely be warranted until  about the end of 2013, while a few others emphasized the need for considerable policy accommodation but did not state a specific time frame or total for purchases. Several others thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet. One member viewed any additional purchases as unwarranted.
But regardless of the above commentary, other guidance provided in the minutes suggested tightening of policy is still a fair way off (suggesting the sell off in Gold was a knee jerk reaction):

To put the above into context, consider the same chart from the FOMC 12 months prior (January 2012):

Over the last 12 months the Fed has pushed out their expectations for length of an easy monetary policy, but following comment that a few dissidents (which there always are) think QE will be wound up in 2013, everyone decides to sell Gold? Seems silly to me. The graphs above strongly indicate the easy money will be another couple of years at least (chances are if the newly announced QE3 & QE4 aren't as effective as expected the timing will continue to be pushed out).

There's a lot of discouraged Gold & Silver holders at the moment as the price chops around in the current trading range, but I would encourage you to stay sharp. Personally I am buying weakness in the opinion a strong rally is not far away.

There has been a bit of chatter around the Fed's monetary base not having expanded despite the recent announcement of QE3 & QE4 whereby they will be purchasing a combined $85 billion per month ($40b MBS, $45b US Treasuries). In fact a well known newsletter writer, Graham Summers, even suggested that the Fed is lying about their new policies (Did the Fed lie about QE & QE4?):
It’s common belief that Bernanke and the Fed are printing $85 billion per month ($40 billion to buy Mortgage Backed Securities and $45 billion to buy Treasuries). After all, these are the policies that the Fed announced in September and December 2012, respectively.

The only issue with this is that the Fed lied.

Today, the Fed’s balance sheet is $1.3 billion smaller than it was at this time last year. Last week it was $19 billion smaller. The largest year over year growth the Fed balance sheet has shown since QE 3 was announced occurred on November 23, 2012 when the Fed balance sheet was a mere $48 billion larger than it was at the same point in 2011.

Since that time the Fed balance sheet has shrunken year over year.

The implications of this are severe. If the Fed is indeed not employing the policies it announces but is simply engaging in verbal intervention (stating it will do something just so the markets react), then it has lost total credibility as a monetary authority and is nothing more than a market manipulator.
But this is a pretty big assumption on his part, it's probably just taking some time for the purchases to take effect on the Fed balance sheet. In fact the QE4 announcement indicates the additional $45b purchases won't start until the end of "Operation Twist" (FOMC Minutes) which didn't complete until the end of 2012:
The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month.
Pater Tenebrarum of the Acting Man blog also provides the following explanation:
Let us first take a look at US money supply growth. So far, 'QE3' and 'QE4' have not yet ignited a strong acceleration in bank reserve and money supply growth. However, one must be aware that this is mainly due to technicalities. For one thing, the Fed's purchases of mortgage-backed securities are subject to a large settlement lag. The first purchases undertaken in the course of 'QE3' (the MBS purchase program) only settled in mid November. Concurrently the treasury drew down $100 billion in deposits it held with the Fed. Since these are part of the money supply, growth in narrow money TMS-1 was negative for the month of November, and growth in TMS-2 was slower than it would have been otherwise. We expect this effect to be temporary; likewise, the most recent data captured in the US money supply growth charts include what is probably a seasonal decline in demand deposits, offset by a much larger increase in savings deposits (the latter are part of TMS-2, but not TMS-1). Currency in circulation continues to grow at a strong pace as well, up 8.9% year-on-year. Moreover, the recent sharp increase in 'securities held outright' by the Fed shows that the new inflationary program is now well on its way.

The monetary base is approaching the upper end of its recent sideways channel. It will likely soon break out to new highs, similar to what was seen on the occasion of the first two 'QE' iterations.
It appears we are seeing a repeat of QE2 when it took a couple of months following the announcement before the monetary base started expanding and the price of Gold took off:

 And here is how the price of Gold reacted over the events:

After dropping to a low of $1303 in late January 2011 (POG was around $1350 at time of QE2 announcement on November 3rd, 2010), the price proceeded to rally, peaking at $1920 just over 7 months later, a 47% move. I think it's likely that we see similar strength in Gold over 2013, a rally which is likely to push Gold well above $2000 and perhaps as high as $2300-2400.

The US isn't the only economic power increasing the levels of QE/debasing their currency, take Japan's new leader Abe who is hitting the print button:
Markets appear to be responding to two key planks of Abe's agenda: his efforts to pressure the Bank of Japan into more aggressive easing and his moves to oblige industry in restarting stalled nuclear reactors.

Abe has also pledged a big new stimulus of more than Y=10 trillion ($112bn), or about 2 per cent of Japan's GDP (to be partly funded by issuing new bonds). It will be spent largely on public works.

He has also dropped broad hints he may postpone a scheduled increase in Japan's consumption tax from 5 per cent to 8 per cent, even though his party agreed with the tax rise originally.

While the long-term wisdom of these moves, and the likelihood that in the short term they will increase Japan's dizzyingly high public debt levels, is being questioned in some quarters, investors clearly like what they see. The Australian
As well as Gold rising in response to the increased amount of quantitative easing, I expect that Silver will also perform well and intend on purchasing some Jan 2015 out of the money options to capitalise on the explosive run I expect we will see in the metals between now and then (I expect Silver to outperform Gold as it often has during periods of high interest in the metals). I will only be putting a small percentage of my overall portfolio into these, but there is the potential for some extraordinary gains in the case that Silver spikes similarly to past runs in the metal which have occurred roughly every 2-3 years from the start of the bull market (below chart from Kitcomm):

I can't know for sure when the rally on back of further QE will begin, but I am expecting it to start in the very near future and it's quite possible that the reason it hasn't started is due to the delay in Fed monetary base expansion which shouldn't be far away. Like the 2011 Gold rally it might start under the radar with a slow but steady increase, followed by an exuberant & near parabolic finish.

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  1. Replies
    1. Thanks. By the way agree with your recent comments on the MB Gold article (as I do most of your comments on Gold):

      If you ever put together your thoughts on Gold into a single article I would love to republish it here as a guest post.

    2. Oh, BB, I'm flattered and honoured ;)

      Yes, I would love to put together my thoughts on Gold one day - wouldn't we all? I've tried to do it in tidbits on my Angles on Economics blog (which is sorely neglected!)...If I ever get around to it, I'd love to send it to you for your consideration and possible posting here....and the world can enojy more of my philosophical hyperbole! ha!

      Very much enjoying your contributions, too.

      Hey, and, re: DFM's opinions on gold taking a dip soon...It's hard to ignore, don't you think? One thinkg I've learnt is how compelling the technicals are - if for no other reason than everyone trades them because everyone trades them, if you get my drift....

      For me, maybe their will be a dip...maybe to $1600? $1550 (though I doubt it, and doubt it will go that low...?)

      However, if it does, i'm definitely buying.

      Moreso, i think whether the dip occurs and to what extent will be very telling signs for the medium-term; a non-breakdown, in "defiance" of the technicals (such as those DFM refers to) would likely spark a rally much higher, maybe past $1800 (?)...depends on what the news flow is at the same time, i guess...

      Also interesting, will be what PMs do in AUD terms, given the AUD's strange quasi-safe-haven (lol) and risk proxy status - ie. PMs moving up in ALL currencies in the medium-term will be quite telling of the transfer of Faith; it will also be good to see what else it is moving up and down against - say, staples like oil, grains, meat, etc.

      My 23423 cents

    3. DFMs charts are interesting, but they take little more into account than the price when there are a bunch of other factors we can consider when looking for tops and bottoms in Gold (or Silver), such as sentiment indicators, commercial positioning, movements of physical in and out of SLV/GLD trusts as well as volume...

      I think there is a better chance of upside from Friday's hammer than downside, but of course can't rule out a break lower... but if it does I highly doubly it's heading as low as DFM suggested ($1200 area a I recall).

  2. Quite Edifying Conversation here and so is the post you've made here. Gold with a growth of almost 450% in last decade i.e 2001 to 2010 makes itself the best of investment market to invest in.