During the first two rounds of “Quantitative Easing” (QE) or in plain simple terms “money printing,” the gold and silver price went through the roof. Literally. Gold more than doubled in dollar and euro terms in some 3 years, while silver went three times higher.
That is where the correlation originated between precious metals prices and “money printing”.
When QE3 was announced, the “Quantitative Easing forever” program, there was a clear expectation of gold and silver prices to move higher. The opposite happened however. The chart below shows how prices of key assets (stocks, bonds, commodities, gold) evolved between the start of QE3 and the start of tapering. The underperformer? Gold.
Logically, the end of QE3 should be impacting gold in a positive way. The clear answer is: yes. The chart below provides the evidence.
The tapering of QE3 is a long process, which, so far, has resulted in a decrease of the bond and mortgage backed securities supply by the US Fed from 85 billion US dollar per month to 25 billion.
- December 18th 2013: taper 10 billion to 75 billion US dollar per month
- January 28th 2014: taper 10 billion to 65 billion US dollar per month
- March 19th 2014: taper 10 billion to 55 billion US dollar per month
- April 30th 2014: taper 10 billion to 45 billion US dollar per month
- June 18th 2014: taper 10 billion to 35 billion US dollar per month
- July 30th 2014: taper 10 billion to 25 billion US dollar per month
The second chart clearly shows how stocks have been suffering as the taper process progressed, while gold has been stable since the start of tapering.
What does all this mean? We believe that “money printing” as such does not correlate in a one-to-one way with precious metals, although it is, so far, highly correlating with stocks. During all the QE phases, stocks have been performing well, while gold has only benefited from QE1 and QE2. Why? Because QE1 and QE2 were periods where the market expected inflation, which is favorable to precious metals prices. On the other hand, QE3 provided THE “risk on” trade; because the invisible hand of the almighty central bank was there stimulate endless risk. That is when gold was literally abandoned, at least among Western investors.
The interesting part is that gold is today behaving as a “risk off” trade, sort of a “safe haven” trade.
What does this mean going forward? That’s hard to say, but the more likely answer is that the “safe haven” trade should continue. With multiple bubbles, including the ones in geopolitical tensions, ebola and currency wars, it is fair to expect a continuing safe haven bid. That would imply that gold investors would be relatively better off compared to silver investors, until inflation expectations return (e.g. because of monetary policy).