Quantitative Easing and Its Impact on Gold
12/12/2011 1:00 am EST
As of this writing on 29 November 2011, the general market has been in a "chop zone" since its plunge in early August 2011. This period of exceptionally high volatility in a directionless market means higher than normal risk. While many stocks have been decimated, gold continues to form a constructive basing pattern.
Quantitative Easing 3 (QE3)
The 2010 meeting in Jackson Hole, Wyoming had Ben Bernanke signaling for QE2, and the markets were off to the races once again on 1 September 2010, just a few days after the meeting.
The question is whether QE3 will have as strong an effect on the markets as QE2, or whether the troubles underlying the markets are so deep, that QE3 becomes a way for big money to more easily exit stocks, thus keeping a lid on the ability for the general market to rally. Keep in mind QE2 was alive and well through June 2011, yet the general markets could not sustain much of a rally in 2011, but rather traded sideways in a choppy, near trendless manner, making 2011 one of the most challenging years yet.
And then there's the Bank of England and the European Central Bank, both who have increased the amount of quantitative easing asset purchase schemes. The ECB is expected to finalize agreement on 1.4 trillion euros if they have not already as of this publication and the Bank of England recently increased theirs from ?200 to ?275 billion.
Meanwhile, gold continues to form a constructive base (as of 29 November 2011). As we have said on various news appearances (FOX, CBS, CNN, etc), with all the quantitative easing going on in the US, UK, and Europe, gold should find its footing then move higher. The question is how long the current basing period will last before gold resumes its long-term uptrend. Some investors may elect to wait for further constructive price/volume action before buying. Others may elect to pyramid into gold ETFs such as GLD and DGP slowly, letting the ETF prove itself on a price basis before adding more to their position. Note, the uptrend in gold began in 2001, so 2012 will mark the 12th year it has been in an uptrend, should its uptrend continue.
The top 8 reasons why gold should continue to uptrend:
1) Global demand for gold is at near-record levels. The two key markets are India and China which together account for 52% of total bar and coin investment and 55% of global jewelry demand. Moreover, Indian and Chinese demand in gold grew 38% and 25% respectively over Q2 2010. After the US debt downgrade, the Chinese complained about US debt, so it is likely the Chinese will continue to buy gold to gradually move away from US treasuries. And India is potentially an even bigger player than China in gold investments.
2) Indian and Chinese demand in gold is likely to continue, due to high growth rates and high levels of inflation in both countries.
3) The impact of the European sovereign debt crisis, the downgrading of US debt, inflationary pressures, the continuing devaluation of major world currencies via quantitative easing/money printing, and the potential for another recession in debtor nations (US, Europe, UK, etc.) are all likely to drive high levels of investment in gold for the foreseeable future.
4) Central banks around the world are likely to remain net purchasers of gold. Purchases of 69.4t during Q2 2011 demonstrated that central banks are continuing to turn to gold to diversify their reserves.
5) Gold is a safe haven when investors get scared, i.e., the fear trade.
6) Stagflation (high inflation, low growth) in the US is in the offing. Remember how well precious metals did in the 1970s? Gold is not just a safe haven but also is a hedge against inflation. As more money gets printed, the higher gold will rise.
7) We are witnessing a worldwide secular gold bull market vs. a US centric one back in 1980.
8) Nothing substantial has been done to address the debt problems in the US, UK or Europe.
We remain long term bullish on gold. Money printing/quantitative easing could prop up stocks, but we could also be in for a period of stagflation where stocks lay limp or remain shortable, so we will let our Market Direction Model at www.selfishinvesting.com which measures the buying and selling pressure in real-time of leading stocks and major market indices guide our long and short sale investments in stocks and ETFs.
Dr. Chris Kacher and Gil Morales are both managing directors of MoKa Investors LLC, Virtue of Selfish Investing, LLC, cofounders of www.selfishinvesting.com and co-authors of "Trade Like An O'Neil Disciple: How We Made 18,000% in the Stock Market" (Wiley, August, 2010).