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Rate Cuts Boost Gold And QE Is Resumed

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Includes: AAAU, BAR, DGL, DGLD, DGP, DGZ, DZZ, GLD, GLDI, GLDM, GLDW, GLL, IAU, IAUF, OUNZ, PHYS, QGLDX, SGOL, UBG, UGL, UGLD
by: Bob Kirtley
Bob Kirtley
Long/short equity, Precious metals, gold, mid-cap
Summary

The Federal Reserve once again moved in an attempt to stimulate the economy and ignite inflation.

The benchmark funds rate was lowered by 25 basis points to a range of 1.5% to 1.75%, gold improved and closed the week higher at $1,511.40/Oz.

The only reason we can offer for such actions is that the liquidity in the repo market has been extremely tight of late.

The European Central Bank will resume buying up government bonds at a rate of €20 billion a month as of November 2019.

In this age of negative interest rates, hard assets will be sought out as the next safe place to provide a home for your wealth.

Introduction

We have long held the belief that gold and the US dollar have an inverse relationship and that the relaxation of monetary policy will eventually weaken the US dollar and, in turn, boost gold prices.

Last week was no exception, as the Federal Reserve once again moved in an attempt to stimulate the economy and ignite inflation.

The day before the FOMC meeting concluded their meeting, gold traded as low as $1,485/Oz as uncertainty and speculation were the order of the day. Once the meeting had been concluded with the announcement of a rate cut whereby the benchmark funds rate was lowered by 25 basis points to a range of 1.5% to 1.75%, gold improved and closed the week higher at $1,511.40/Oz.

As for the rhetoric, the Fed hinted that it may pause rate cuts from here as they tried to calm the markets. All I can glean from this meeting is that they are still 'data driven' on a month by month basis and last year's mantra of rate normalization via rate hikes has well and truly been taken off the table.

Given that the US has the lowest unemployment figures for 50 years and that inflation is a tad lower than their target rate of 2%, it seems to me that these rate cuts, of which we have had 3 this year, are totally unnecessary.

They also commenced an operation, to last at least six months, to purchase around $60 billion of Treasury bills each month in response to the sudden spikes in overnight interest rates in markets.

The only reason we can offer for such actions is that the liquidity in the repo market has been extremely tight of late and the Federal Reserve wishes to ensure that the banks have sufficient funding to remain operational.

We can put to one side the rationale for such actions, however, we must recognize that monetary policy in the US is now one of the rate cuts and quantitative easing, which will, in turn, be supportive of the price of gold.

European Monetary Policy

As we all know; money knows no borders, so quantitative easing or the printing of more money anywhere in the world increases the supply of money on a global basis. So, we need to be aware that the European Central Bank (ECB) will resume buying up government bonds at a rate of €20 billion a month as of November 2019, "for as long as necessary," it should be noted that the head of the European Central bank, Mario Draghi, has now resigned and his post has been filled by Christine Lagarde who has yet to address the issue of monetary stimuli.

The International Monetary Fund

The International Monetary Fund (IMF) warned recently that the world economy was in a "precarious" state and cut its growth forecast to the lowest level since the 2008 crisis.

When we see such statements from the IMF, we can only conclude that all is not well on the economic landscape, and therefore, we should take precautions to protect ourselves from a possible downturn in economic activity.

The Charts For Gold And The US Dollar

The chart below shows just how volatile the US dollar can be especially around that pivotal area of 97 which acts as both a support and resistance level.

The Gold Chart

The chart below shows gold's rally to the $1,550/Oz area and the ensuing correction that has seen gold retrace its steps to around $1,480/Oz. As corrections go, this one hasn't been too severe.

Conclusion

The easing of monetary policy tends to have a negative effect on the dollar and a positive one on gold and silver.

Those of us who are gold bugs need to follow the world's central bankers closely as every sound bite they make has an effect on both the dollar and inversely on gold.

The lower the rates go and the more money they print, ultimately, weakens any currency, and gold will be the beneficiary as they can't print it.

In this age of negative interest rates, hard assets will be sought out as the next safe place to provide a home for your wealth, so give this area a significant amount of your attention as the right moves now could protect you through any hard times that lay ahead of us.

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Go gently.

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