Shares of Barrick Gold (NYSE:ABX) have been trading up in recent weeks. From August through September, the stock has risen by nearly 26.8%. In comparison, during the same time period the price of gold has risen by 9.8%, and SPDR Gold Shares (NYSEARCA:GLD) has increased by 9.5%. Then there's the recent FOMC decision to launch another quantitative easing plan, this time -- as opposed to the previous QE plans -- with no time limit and a promise to add additional monetary steps if the U.S. economy doesn't turn around. Will this news pull up the price of gold and, by extension, bullion producers such as Barrick? I think there are some factors that could curb the rise of the price of gold so that it may not reach $2,000 this year.
Let's see what the bullion market has done so far this year. In the chart below are the normalized indexes of Barrick's stock, gold, and the S&P 500 (prices are normalized to Jan. 3, 2012). As you can see, Barrick's stock increased in recent weeks, but still hasn't recovered from its tumble during May and July. Despite this rally, the stock is still nearly 18% below its initial rate from the beginning of 2012. On the other hand, the rates of gold and S&P 500 have both risen slightly above their initial starting points.
Click to enlarge image.
The market reaction to the recent FOMC decision happened very promptly, as the price of gold rose by over 2%. Currently, however, the price of gold is only edging up.
Here are several factors worth considering that could curb the recovery of the price of gold and impede it from reaching the $2,000 mark this year.
The market has already incorporated the announcement of QE3 following several news items that came out in the past several weeks, including the following: the publication of the minutes of the FOMC meeting, in which many FOMC members voiced their opinion to issue QE3; Bernanke's speech at Jackson Hole; and the recent U.S. payroll report, in which only 96,000 jobs were added last month.
Furthermore, QE3 -- as opposed to QE1 and QE2 -- was long overdue, and the speculation around its announcement goes back to 2011. I have also discussed the correlation between Google trends for the word "QE3" and the price of gold. The peak of the search trend was in August-September 2011, around the time of the U.S. debt ceiling debate. Thus, the market may have already priced in QE3 from back in 2011.
Despite the implementation of QE1, QE2, and Obama's rescue package from 2009, there is still no evidence for a rise in inflation. As of August 2012, the inflation is less than 2%, which is the inflation target of the Fed. One of the reasons for the rise in demand for gold is to protect investors from inflation. Since there is still no sign of inflation, it could mean the U.S. economy is still in a liquidity trap. In any case, the low inflation may have eased some concerns of investors so that another QE program won't substantially reduce the value of the U.S. dollar.
The Fed kept the target inflation at 2% and stated that it will continue monitoring the inflation rate. This statement may have also reassured many traders that if there are signs of a rise in inflation, the Fed won't stand by but will react, probably by raising the short-term interest rates (even though it had pledged to keep rates low until mid-2015).
There is the possibility that CME will intervene in the bullion market, as it did several times in the past by raising the margins on gold. That will keep the price of gold below the $2,000 mark.
Therefore, the price of gold -- and by extension bullion producers -- is likely to continue rising, but there is a chance that this rally won't put the price of gold over $2,000 this year.
For further reading, please see "On The Relation Between QE And Gold."