Monday, August 15, 2016

Gold Prices and Quantitative Easing

September 30, 2010 by · Leave a Comment 

By Cesar Zambrano, Forex Fraud

In 2008 when The Great Recession erupted with the failure of Lehman Brothers and several other major financial firms, the Federal Reserve committed to slashing short-term interest rates to historically low levels and injecting unprecedented amounts of stimulus into the economy.  The reason was simple.  Fed Chairman Ben Bernanke had watched Japan suffer through a severe recession during the late 1980’s that shared strikingly similar characteristics to the U.S. problems.  The recession in Japan was caused by a credit bubble that caused real estate prices to become dramatically overvalued; eventually, when the bubble burst in Japan, the Japanese government, in most economists’ opinion, waited too long to take real, practical steps of injecting monetary stimulus into the global economy.

When the Bank of Japan did finally inject stimulus into the economy, it was too little too late; in fact, Japan has attempted to stimulate its economy in a myriad of ways over the last 15 years, and since Japan waited too long to initially jumpstart the economy, it slipped into an extended period of deflation that has famously become known among economists as “The Lost Decade.”

This entire scenario in Japan is one of the primary reasons that Fed Chairman Ben Bernanke was so quick to move at the outset of the crisis.  His economic belief, whether right or wrong, is that government must play a large role in stimulating an economy during times of economic contraction, and he therefore believes the “help” must be big and swift at the outset of a crisis, so that an economy never slips in deflation.  Mr. Bernanke’s willingness to print money in order to stimulate the economy was clearly outlined in a speech he gave in the early 2000’s when he said that, if need be, he would print money and drop it from helicopters to stimulate the economy.  This earned Mr. Bernanke the nickname of “Helicopter Ben” by the financial media.  Traders bet against the dollar at various forex brokers.

Thus, we come to the current economic slow-down in the U.S. economy.  At the outset of the recession, the Federal Reserve injected massive stimulus into the economy in the form of quantitative easing.  Although politicians and economists argue whether the first round of stimulus was effective, the economy did rebound nicely off its early 2009 lows.  In fact, by March/April of 2009, it seemed that the greatest economic threat of modern times had been averted.  Equity markets rebounded, property markets stabilized, economic growth resumed, and it appeared the global economy was headed for a V-shaped recovery.

Then, in late spring/early summer of 2010, the U.S. economy began to show signs of significant slow-down.  Key economic data out of the U.S. began disappointing in steady fashion throughout June, July, and August of 2010, and in late July Mr. Bernanke testified before Congress and stated that his economic outlook for the U.S. economy was “unusually uncertain.”  This slow-down in the U.S. caused Bernanke and his team to resume talks of possibly instituting another round of quantitative easing measures.

A forex demo account is a great way to practice trading the U.S. dollar.

In late September, the Federal Open Market Committee statement made it clear the Fed would be instituting another round of quantitative easing in either November or December.  The market began pricing this action into several assets including the U.S. dollar and gold.

First of all, the U.S. dollar has fallen precipitously in September as investors have been pricing in further quantitative easing from the Fed.  Primarily, quantitative easing exponentially increases the supply of U.S. dollars in the real economy, and this decreases the amount of a currency.  Gold, on the other hand, is now at all-time HI’s above $1,300/ounce due to the global uncertainty that the current U.S. slow-down is causing.  Investors are fearful of possible deflation and want safety of capital, and gold is a hard asset that investors believe will not lose value over the long-term.

If the Fed does continue to institute further quantitative easing measures, then gold should continue to increase in value, even though it is at all-time HI’s.  Although it will most likely have to correct in order to find further buying support in the near and mid-term, gold should continue to move upwards as the Federal Reserve expands its balance sheet at a historically unprecedented pace.

Speak Your Mind

Tell us what you're thinking...
and oh, if you want a pic to show with your comment, go get a gravatar!