QE3 is bad for Gold

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US consumers are shopping again. But not for gold.

The price of gold fell by as much as $25 an ounce to touch $1,730 on Monday after data showed a surprisingly strong September for US retail sales.

The metal recovered somewhat during the day, but was still trading down $21.80 or 1.2% at $1,737.90 in early afternoon trade – a one-month low.

The better-than-expected retail figures – the US economy is 70%-driven by consumption – came on the heels of a raft of positive economic news in the US including an increase in consumer confidence and a jump in jobs.

The news has been good for the dollar and at the same time diminishes gold’s allure as an inflation hedge and storer of wealth amid currency depreciation.

Crucially, the better economic outlook may mean that the Federal Reserve will end its latest, most ambitious, round of quantitative easing to keep interest rates low and flood markets with cheap money, sooner rather than later.

QE has been a massive boon for gold – QE1 kicked off on 16 December 2008 when gold was priced at $837 – and should it fall away it will eliminate a major factor behind higher prices.

Given gold’s relatively mild reaction to the announcement of the open ended QE3 in September – it has failed twice to make new 2012 highs above $1,800 – it can also be argued that the US rounds and similar measures in the EU have lost their impact anyway.

Nouriel Roubini – also known as Dr Doom for predicting the global financial crisis in 2007 when everybody else was still suffering from irrational exuberance – takes a look at quantitate easing in today’s Guardian newspaper.

Roubini is professor of economics at New York University’s Stern School of Business and runs his own consulting firm – unsurprisingly he has few good words for the US Federal Reserve and its ultra-loose monetary policy. Basically, Roubini says, the mechanism is broken:

Meanwhile, the main transmission channels of monetary stimulus to the real economy – the bond, credit, currency, and stock markets – remain weak, if not broken. Indeed, the bond-market channel is unlikely to boost growth. Long-term government bond yields are already very low, and a further reduction will not significantly change private agents’ borrowing costs.

The credit channel also is not working properly, as banks have hoarded most of the extra liquidity from QE, creating excess reserves rather than increasing lending. Those who can borrow have ample cash and are cautious about spending, while those who want to borrow – highly indebted households and firms (especially small and medium-size enterprises) – face a credit crunch.

The currency channel is similarly impaired. With global growth weakening, net exports are unlikely to improve robustly, even with a weaker dollar. Moreover, many major central banks are implementing variants of QE alongside the Fed, dampening the effect of the Fed’s actions on the dollar’s value.

 

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