Shares of Barrick Gold Corporation (ABX) have risen in recent weeks: During August the stock has risen by nearly 12.8%, but it has declined by nearly 21.3% year-to-end. In comparison, during the month, the price of gold has risen by 3%. SPDR Gold Shares (GLD) has increased by 2.6%. The recent speech of Chairman of the Fed, Ben Bernanke, lifted the expectations that the FOMC will announce of another quantitative easing plan in the near future, which will rally the prices of gold. Let's examine what is up ahead for the gold market.
The recent recovery of gold was mostly related to the renewed expectations that the FOMC will act in the near future and issue another quantitative easing plan. The publication of the minutes of the FOMC meeting showed that many FOMC members are leaning towards issuing QE3.
The recent speech of Bernanke at Jackson Hole also rekindled the hopes of many bullion investors that another QE plan is right around the corner. In his speech Bernanke voiced his concerns regarding the effect of another program to expand the Fed's balance sheet. Some of these concerns were: the diminishing return another QE program will have on the economy, the effect the program could have on inflation, and the Fed's capability to exit from its policies at the appropriate time. Nonetheless, it seems that Bernanke and many FOMC members are considering issuing another QE program, but not all of them.
The main reason the Chairman considers another QE program is because the U.S economy showed little signs of progress: U.S GDP expanded by only 1.7% during the Q2 of 2012, and unemployment declined by less only 1.5 percent points in the past couple of years.
I have already referred in the past to the strong relation between the U.S money base and gold. As I have shown in the past, during the past several years the hike in the prices of gold coincided with the sharp expansion in the money base, following the introduction of QE1 and QE2.
I still guess that the FOMC won't intrude another QE program at least until after the U.S elections. The Fed's stimulus plan should be accompanied in a stable political environment and preferably with a clear fiscal policy.
The next time the FOMC will debate about this issue will be in two weeks on the next two day FOMC meeting, between September 12th and 13th.
In the chart below are the normalized prices of Barrick's stock, gold and S&P 500 (prices are normalized to January 3rd 2012). As seen, Barrick's stock jumped in recent weeks after the stock had tumbled between March and July 2012. Despite this rally, the stock is very far off the growth of the S&P500 on a yearly scale. Further, the price of gold hasn't performed well during the year, so far, as it rose by only 4.3%.
The recovery of the Euro may have also contributed to the rise of gold: During the month the Euro/USD rose by 1.6%. During the month, the linear correlation between gold price and Euro/USD was 0.53. This correlation could suggest that if the Euro/USD will continue to rise in the near future, it could help in the recovery of gold prices. Tomorrow's ECB's President Speech, Mario Draghi, could offer some insight behind the future steps of the ECB in regards to its bond purchase program that could also affect the Euro/USD.
Therefore, the bullion market continues to recover and may continue in the near future, but I still think the FOMC won't introduce another quantitative easing plan in next FOMC meeting. I also guess that without QE3 there is little chance to see a sustainable rally in the price of gold and, by extension, Barrick and other gold miners companies.
For further reading: What Affects the Price of Gold?