The biggest influence on gold prices right now is the monetary easing policy that the market has been anticipating in the U.S. and/or Europe. If the central banks were to initiate another monetary stimulus designed to encourage growth in the economy, gold would be one of those benefactors. This would increase the pressure on long term interest rates, possibly fuel inflation fears, and weigh in the value of the dollar. All these things fuel gold prices. LGT Capital Management analyst Bayram Dincer shared this view on what central banks will do:
My general view is that for the time being major central banks will let go of the mandate of price stability in favor of spurring growth figures. This means that the central banks in an explicit or implicit inflation targeting regime will try to anchor inflation expectations around 3.0 percent," he said. "This change would be gold price supportive.
There has been a lot of anticipation for this stimulus to come through but the winds may be changing.
Maybe The Stimulus Isn't Coming!
The latest U.S. economic data may have reduced the probability of the third round of easing. Goldman Sachs Group said,
We have been writing for the last couple of months that the recent advances in the markets, now up 12% for the year, combined with unemployment claims falling, slow but increasing employment, and economic variables that are soft but not recessionary, will keep the Fed on hold for now.
When we observed the latest unemployment, retail sales, and industrial production numbers, they were inching their way up, not helplessly falling. With food and energy costs also rising, the numbers don't appear to be supporting a Fed intervention.
Remember Draghi's speech about "doing anything it takes?" Then Bernanke also created overtones of acting if necessary. Well, immediately afterwards the markets moved up quite a bit in anticipation of easing taking place. As stocks continue to rise, money would naturally rotate from bonds to the market. One would also think the credit markets would also be selling holdings (locking in capital appreciation) as it anticipates action from the Fed. Well, neither of these signs appears to be taking place. And wouldn't money be flowing into equity funds from your average investor? Yet, recent data from ICI is showing funds still flowing towards bonds.
The Movement Of The Dollar Is Another Stimulus Sign
When the first stimulus from the Fed took place, the value of the dollar declined during this period but advanced for a time when it ended. It didn't take long for the dollar to turn south again and the Feds come along with another stimulus with the same results. At the end of the second easing the dollar started to advance and it hasn't stopped. Evidently someone has forgotten to tell the dollar we are at the brink of economic collapse and that faith in its value is dwindling. As it stands now, the actions one would anticipate for a third quantitative easing seems distant. Think about it. If those who trade currencies believed that Draghi's speech had any real substance to it, don't you think they would be moving into the Euro and out of the dollar? If the dollar would be holding the same pattern in anticipation of another stimulus, it seems money would be leaving, but as recently as August 10th, Jeff Opdyke of the Solid Investor wrote:
Most investors are dumping the euro - and just about every other currency - to hide out in the U.S. dollar, still perceived as a safe-haven.
Gold As Stimulus Sign
Just as the dollar's pattern has been a sign of quantitative easing, so has the price of gold. As the fear of a failing economy grew larger and QE#1 and QE#2 came closer, the price of gold ran up ahead of each easing. But right now, it is just not happening. The price of gold is not going up in anticipation of anything.
It Doesn't Look Like Anything Is Going To Happen
From the signs I see, an intervention by September does not look likely. The Fed's intent with the easing would be to lift consumer confidence so that consumers spend, boosting the economy. This happens when asset prices are lifted. But the market is already supporting gains for the year and consumer confidence is still lagging from the reality of an economy that just can't get moving. An intervention must happen in times of weakness with different elements like:
- A possible recession looming
- Market levels having a negative impact on consumers
- Deflation on the rise
Well, it is just not happening right now. So as of this moment, I do not see a stimulus package happening and I do not see gold going up in value because of it.
What If You Own Gold Now Or Are Interested In Buying It?
If you own gold now, just hold on to it. Long term it will go up. Right now it is just in a long term consolidation pattern. Buying gold right now might be risky. The signs don't point to any immediate price increase. If one buys now, be prepared to hold it for a while before any value comes to it. Another option would be to wait for impending signs of change like the dollar changing pattern and losing value or economic conditions to form a worsening pattern. These signs will be the first indication of a possible price change for gold.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.