Does QE Mean Anything To The Price Of Gold Anymore?

by: Dickson Buchanan Jr.

Ever since Nixon took the US off the gold exchange standard, gold started trading like any other commodity. Over time it has become known as the "safe haven" asset in the broader investment community. This label assumes there are dangers and risks associated with other investments, otherwise, "safety" would not be so attractive. A list of the standard reasons for investing in gold would include fear over price inflation, unstable governments, currency debasement, or as a "if all hell breaks loose" insurance policy. Most financial advisors recommend owning some gold, albeit very little (5-10%). The dollar price of gold will tend to reflect current events that either support the fears mentioned above (gold price rises) or serve to abate them (gold price falls).

However, recent history does not fit this traditional trading paradigm for gold at all. On November 11, Forbes published an article titled; Gold is no Safe Haven, no New Investment Class, no Substitute for Paper Money. The article lives up to the title. It paints a pretty blunt but clear picture about gold in 2013. As a buyer of gold, I had to admit, it was painful. Notwithstanding, what is surprising is that there is no shortage of events that should have spurred the price of gold higher this year according to the conventional wisdom. This is most true in reference to the continued commitment of "Quantitative Easing" by the Federal Reserve. Since its inception QE has been a boon for gold and silver prices due to the systemic risk it poses. See the below chart.

Yet, since the $200 plus collapse in April, the trend seems to have all but disappeared. This is in spite of no tapering of QE whatsoever. There has been plenty of "taper talk," to be sure. But the Fed has been reluctant to walk the "taper walk." Instead, what we see is gold spiking upwards after any FOMC meeting or other similar news indicating the continuation of QE, but then it reverses within a week. In some cases, the gains disappear before the close of the same trading session. The following chart gives a couple of recent examples.

The first example is the great "Taper Fake Out" in late September. Towards the end of summer, everyone had been expecting the FED to taper. They did not. Gold shot up $50 on the day, as many expected it should. But who thought it would give up the lion's share of those gains just three days later?

In October, a similar paradox occurs. The government shutdown is looming along with a possible default scenario. For many gold buyers this signaled a loss of confidence in the dollar, which should drive up the the price of gold…so it would seem. It is not such a logical leap to think that the currency of a government who cannot avoid shutting down, even temporarily, should suffer right? Yet it was the gold price that fell. And as if that weren't mind boggling enough, once the shutdown was averted and the debt ceiling raised, it rose again.* Surely this had some gold buyers scratching their head.

A final example would be Dick Fischer's statement on October 17th that tapering would not be likely by the end of 2013. Dick is president of the Dallas Fed and is more opposed (hawkish) to the Fed's bond buying program than the others. Gold shot up again and then again three days later, dropped back down.

It has been declining ever since.

All this begs the question; does QE mean anything anymore for the price of gold? The question should not be so easily dismissed as many goldbugs might want to. Sound investors should always be considering the other side of every trade. If QE were irrelevant to the price of gold then a major flaw lies in the conventional trading paradigm. After 2013, any gold buyer should be taking a hard look again at what the fundamental reasons for buying gold really are and not just take the conventional wisdom at face value.

This is a timely question especially in light of the newly appointed Fed chairman, Janet Yellen. By all considerations, she is likely to continue if not increase the QE program started by Ben Bernanke. Historically, this information would be bullish for gold. In fact, as I was writing this last Thursday prices were up on the news that Yellen approves of QE and plans to stay the course until "the economy improves." But how long will those prices be up? Will gold see double digit gains as it did after the initial announcement of QE 1 and 2? Or will the recent trend prevail?

Moreover, if the market supposedly accounts for "forward guidance," doesn't the market have all the forward guidance they need with a chairman such as Yellen? And yet the price is not rising. It is declining.

To conclude, I think 2013 shows that it is high time to question the conventional reasons for why to invest in gold. Either the market does not know what is going on, or the conventional reasons for investing in gold are at worst fundamentally flawed and at best, need some refining (pun very much intended). Of course both could be true at the same time. In the meantime, it remains to be seen if gold will make up its mind about QE or not.

*There was of course an alternate explanation immediately following the events. Essentially, it was supposed that avoiding a government shutdown was ultimately bullish for gold because it meant inflationary policies would continue.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I appreciate your thoughts, comments and constructive feedback. Thank you.