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The Gold Price and Quantitative Easing

If you read and accept the typical Internet headlines on the gold price you will no doubt believe that if the U.S. Federal Reserve and other central banks introduce more quantitative easing in the weeks and months ahead that will spur the gold price to new heights. It may well, but if that does happen an important question has to be: why will that occur?

Many reporters and commentators seem to link quantitative easing (as an ultimate cause) with in the end high rates of inflation (as the ultimate effect). Whether they do this or not, gold viewed as a 'real money safe haven' - terms often used in connection with gold - has to viewed in those contexts as a 'place to be invested' in the case of a cataclysmic financial event or series of events.

It follows, or so I think, that for the financial markets to price gold higher than it now is in the event of further quantitative easing is tantamount to those financial markets in essence saying "quantitative easing in the end will not result in long-term meaningful economic recovery", but rather "will contribute to continued economic decline".

This seems oxymoronic with quantitative easing also resulting in the financial markets generally in recent years stabilizing or improving from current levels. This is because in 'good' theory 'financial market values' are at any given point in time 'the present value of all future expectations'. A very important question: Has financial market practice parted ways from sound market valuation theory? This is something to think very hard about.

While doing that you might want to consider:

  • that today Goldman Sachs has been reported as suggesting the gold price may move upward to U.S.$1,840 by year-end on incremental quantitative easing; while,

  • at the same time to the best of my knowledge Goldman Sachs currently is not predicting a major financial markets downturn.

Consider that the physical gold price arguably ought not to parallel the financial equity market indexes - short of purely being 'traded on the same parameters'. I suggest you think hard about this statement, and determine whether you agree with it.

Recall the negotiation story that suggests that when an American, in negotiation with Japanese businessmen, commented that they were really getting somewhere because they were thinking together 'parallel' the Japanese businessmen immediately terminated negotiations. The reason - parallel lines never meet.

Topical Reference: Gold to remain glued to Bernanke's testimony next week, from Commodity Online, from Sharps Pixley, July 14, 2012 - reading time 2 minutes; and Gold looks bullish, to reach $18,40 by year end: Goldman Sachs, from Commodity Online, July 17, 2012 - reading time 1 minute.

 

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