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Do Gold and Silver React to QE Anymore?

Hard Assets Investor made the observation – The QE trade is over, noting that price fluctuations in gold have been disconnected from monetary policy for a while.

As a practical trading matter, Hard Assets Investor is correct. It seems now QE (quantitative easing) impacts the bond, stock and real estate markets but not the gold and silver markets. This is a reversal from the early years of QE when gold and silver soared as a result of QE and real estate was stuck in a rut.

The prevailing trading wisdom seems to be:
-if a handful of doses QE hasn’t created price inflation by now, it won’t ever and hence there is no need to own an inflation hedge like gold or silver; and
-QE only impacts the bond, stock and real estate markets.

Is this true?
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SteveMT's picture

Are prices really going down? Haven't seen that.

What is going down are the sizes and the amounts of products being packaged. The price is constant, but the amounts have been decreased. That is still called inflation, or are you still interested in that great buy on some low land in Florida?...a rose by any other name. When this coming disaster hits, there will be no time to react, no time to re-change the strategy. A 30% decrease in dollar purchasing power will not be forecast months, weeks or even days in advance. It will just happen quickly, like SHTF and then splatters. The pieces are being positioned now, like in chess.

"QE to infinity." Interpretation: A printing press will create money out of thin air forever without any problems at all.

Think about how impossible that phrase sounds before selling your gold.

Thoughts

Inflation (increased money supply) has price increases as a lagging indicator.

1. Prices can't rise until all the clearance sales are done, and people have begun to quit doing business (reducing supply and letting the prices rise).

2. If demand is being reduced because of fear, for example (layoffs, headlines, home prices, tax increases, etc.), then the rise in prices (except for some food, but not restaurants) is delayed.

Upward price pressures: If the public became convinced that good times are here, again, and started spending, prices could rise very, very fast. If the public became convinced that mortgage rates will keep climbing (as they are), those on the fence will jump in and borrow more money into existence. If some war or disaster tied up shipping, supply would dry up, fast. Any supply constriction would also cause everyone who has cash to get out of cash very quickly (as would bank problems), and that would drive up prices.

Once the contagion begins, it goes fast. Clearly, money right now is sloshy--sooner or later it's going to flow out of the tub.

What do you think? http://consequeries.com/

Gold and silver are down

Gold and silver are down because of only one reason...massive paper being sold into the market in a desperate attempt to crush prices. The band will continue to play until the first large buyer goes to take physical delivery and there is none to deliver. Then you have force majeur.

That day is coming much sooner than many realize. Forget technical charts...forget trends...demand is outpacing supply for the physical. Once the physical can't be delivered, it's game over.

For all of you who think you're 'getting over' or are 'one step ahead' by holding cash, just wait until the first US bank 'bail in'. You don't own the money in your bank account...it's a loan to the bank. Many will learn the hard way.

“Let it not be said that no one cared, that no one objected once it’s realized that our liberties and wealth are in jeopardy.”
― Ron Paul

fireant's picture

It helps to distinguish between cash and digits

in a bank account. They are not the same. The Cypriots who had cash in the mattress were sitting pretty, as an example. It was the ones depending on "cash" in the bank who were hurting. Point well taken though. If it's in the bank, it's at risk.

Undo what Wilson did

The Germans holding cash

The Germans holding cash didn't do well. I do agree with your point though (unless your house catches on fire, then you're screwed). Digits are nothing. Don't miss the 11:25 mark...


http://youtu.be/v2lcUT1eMBE

“Let it not be said that no one cared, that no one objected once it’s realized that our liberties and wealth are in jeopardy.”
― Ron Paul

Agree 100%

What astounds me is how small the silver palladium and platimum markets are and how important they are to industry.

I think 30-60 billion buys you all the silver available!!
That is a drop in the bucket -the fed prints 85 billion a month!

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fireant's picture

Yes, but if the amount of juice isn't increased exponentially,

they won't react with higher prices. 85b a month is already cooked into the pie. Just like drugs, it takes more and more to get the same high.
The next leg up in metals will be driven more by war, and what happens in Europe imho. If war in the ME gets hot, and/or if Europe tanks with bank failures, I'd expect strong moves up in gold.

Undo what Wilson did

But the money supply is only increasing at 6% a year since

2008. Where is the electronic (printed) money (or should I say pre-money???) ? And what will set it free?

fireant's picture

It's staying in the banking system.

A lot of it is going toward covering toxic assets (deleveraging). Consumer and business loans is what will "set it free", and that will take a robust economy. About all Ben has been able to accomplish with his trillions of digital dollars is keep the banks solvent and the stock markets propped up.
Wish I could answer your questions better. There are more qualified people here who can.
Ps: Roll Tide!

Undo what Wilson did

Have questions related to this that I need ur help in answering!

The money base is expanding by 1/3 a year, but m2 (money) is basically only growing at a modest 6%. Therefore, CPI is not increasing. The money base is expanding through an increase in excess reserves. But the old "too many dollars chasing too few goods" scenario isn't unfolding.

Points of confusion: The multiplier has gone from about 9 to approx. 3. SO banks are not lending. Reason given is that there is a basic shortage of acceptable risk loan applications and money lending is independent of the size of reserves.

But I thought the Fed, through QE, was buying bonds (treasuries and MBS's) from primary dealers (eg. Goldman Sachs, Merrill Lynch, etc), not traditional banks. If so, isn't it true that QE can't be increasing excess reserves at Bank of America, Citi, Wells, etc.

In my mind, I see the printed money stuck in excess reserves so to speak. That is why the lack of inflation. But if Bonds are being bought from Goldman, it goes into Goldman's accounts or customer investment accounts. It should flow into the markets and the real economy world wide. This would explain the "stock market bubble", which has been connected to FED actions and which would explain the disconnect between the market and the sluggish economy.

I have also read that the primary dealers are reinvesting most of this back into new issue treasuries at the auction. But if they solicit one of their investment account holders to sell a treasury to the Fed (which they do), then those proceeds do enter the economy. Further, it is my understanding that excess reserves cannot be invested in equities, and for the most part are parked at the FED at .25%.

Increasing my confusion is that not only am I confused as to the origin of the excess reserves, I don't even know if this money base statistic is even inclusive of the Investment Bankers( i.e.. Authorized Treasury Dealers). Technically, they are now banks.

But where are excess bank reserves coming from? Are these two separate issues. Does QE have nothing to do with excess reserves? I don't think this is the case.

What I am grappling with is the $80,000,000,000 per month money flow. If banks are not lending, money is not being created. Which explains the pull back in precious medals.

Someone who has figured all this out, please help me with some of the details. If I could figure all this out I could understand a bit better what might happen to m2 down the road, and it follows, inflation and the price movement of precious metals.

In summary, if excess reserves are swelling due to QE, then in effect, the FED is trying to "print" money, but not really succeeding. They are manipulating rates down, which would raise asset prices (or prevent further deflation), but they are not adding to the money supply, which requires lending.

A shot at a response

"But I thought the Fed, through QE, was buying bonds (treasuries and MBS's) from primary dealers (eg. Goldman Sachs, Merrill Lynch, etc), not traditional banks. If so, isn't it true that QE can't be increasing excess reserves at Bank of America, Citi, Wells, etc."

The Fed buys the treasuries from primary dealer but the proceeds to to the US govt. The dealers only take a commission. Re the sale of MBS-these are essentially bad loans that the fed buys and takes off the banks' balance sheets and pays cash thereby injecting liquidity into the dealer banks.

The non dealer banks get excess reserves via the original bailout and having access to the free fed funds rate where they can borrow at next to nothing-that is how those banks increase their reserves.They also increase their reserves via the sale of the MBS to the primary banks who know they can unload them to the Fed.

"This would explain the "stock market bubble", which has been connected to FED actions and which would explain the disconnect between the market and the sluggish economy."

The stock market is up because there is no return on bonds as interest rates are low via the fed, earnings are good because companies are buying back their stock with cheap loans and taking shares out of circulation making their earnings per share seem better,and they have fired boatloads of people or put them on part time making their expenses lower and earnings better-but revenues aren't really increasing because consumer spending is tepid because they are deleveraging and their wage growth is lower than inflation!

"In summary, if excess reserves are swelling due to QE, then in effect, the FED is trying to "print" money, but not really succeeding. They are manipulating rates down, which would raise asset prices (or prevent further deflation), but they are not adding to the money supply, which requires lending."

The lending of excess reserves is one way to increase inflation and you are correct if the money is not lent then its parked in what Rick santelli called to day a Jurassic Park wire fence that will come out one day. But since it hasnt there is no inflation from that money yet.
As interest rates rise and people rush to buy homes before they rise further that money will come out.

But we are missing another piece of the puzzle
The trillions of treasuries that the fed has bought goes to fund the wars, social spending, IRS, DNS FBI, CIA wast fraud and abuse and keeps government spending high which is a large portion of overall spending. This is spending that the government would otherwise not be able to spend-there is no way they could tax the people for all this money spending so the fed buys the debt from them.

Think back to the 70's -government deficit spending and going off the gold standard caused massive inflation as the guns and butter programs of the 60's and 70's were paid for with printed money-think Great Society, War in Vietnam

Hope that helps
Keep in mind economics is not a provable science as you cant ever have a control group. So my analysis could be way off.

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Thank you for your reply.

A couple of things.

I believe with QE, the FED is buying bonds from the banks, giving the banks created computer money for the full value of the bonds, thereby increasing reserves. The dealers may then turn around and buy new issues from the Treasury auction with the proceeds, but it is two separate transactions.

You observations on Govt spending is noted.

My understanding of how money is created is that bonds are purchased from banks, thus increasing reserves, which allows for the creation of deposits through lending within the constrains of the reserve requirement (10 to 1, I believe). The current circumstance is one in which deposits are running at 3x reserves, as opposed to the permissible 10x. So theoretically, the Banks have a lot of slack lending capacity, but are not lending.

"The non dealer banks get excess reserves via the original bailout and having access to the free fed
funds rate where they can borrow at next to nothing-that is how those banks increase their reserves."

Excess reserves continue to grow at astounding rates. Point taken about the TARP. But that can't explain the trillions in new reserves since the bailout. And i would doubt much borrowing is taking place from the
the discount window because the system is awash in reserves. Plus, the reserves are getting .25 in interest, which equates to billions.

Maybe credit is contracting in the economy so quickly that the created money is being overwhelmed, leaving us with a net modest increase in M1.

You make very good points about low rates and earnings driving the market. Maybe that is the sole mechanism through which QE is driving the market. I guess I have wrongly assumed that some of this "newly created money" was finding its way into the market.

yes when the fed buy garbage MBS

from banks they take bad assets off their book and replace them with good assets-cash.then they take that cash and earn interest on it from the fed.
So instead of having a liability they have an asset producing interest-abracadabra!

That is the newly created money but you are right that alone sitting on the balance sheet doesn't create price inflation

The low interest rate environment boosts the stock and real estate markets which raise asset values and then people spend money driving up prices of other goods and services (the supposed wealth effect)
This is less direct than the money "given" to the banks" which as you point out does not cause price inflation if it just sits there.

There is as we noted a direct give to the US government which allows it to spend without consequence or concern via the Fed's purchase of US treasuries.

The problem with the wealth effect is that it can be wiped out on a single trading day one afternoon. Then what has the Fed done?

http://smaulgld.com/fed-puts-markets-on-noticepossible-disco...

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Looks like this call was right on the money

Continued Qe but the gold and silver market reaction muted

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Michael Nystrom's picture

Yup, good call

I would expect the PMs to continue falling. For how long, I'm not sure, but the trend appears to be in force.

He's the man.

The fun will come as we discussed last night

How far will the fed keep the easing going and what will be the impact?
Qe forever has to have some consequences

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Please see my post above.

We have to figure out why M2 ( defined as time-related deposits, savings deposits, and non-institutional money-market + currency ) is only increasing modestly.

ok will review now

may take a while before I can respond

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I'd be careful about selling

I still think PMs will have their day (or much longer than a day!)

They've still gone up greatly over the past decade or so. Plus from what I've read, there is huge physical demand right now that is way out of line w/ the price movements. Think of Germany requesting their gold back and it taking 7 years as opposed to the huge recent paper short that was dumped on the market all at once (doesn't make sense for someone to do that if they wanted to get a better price).

the fundamental reasons for holding gld and silver

did not change with this announcement

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Derivatives on the PMs are

Derivatives on the PMs are forcing the price down. Someone has an incentive to continue to sell short into the market. Hmmm, I wonder who that could possibly be? Physical demand continues to be at all time highs. This could only mean on thing: when reality takes over the price will be even that much higher. We all know the real estate market(fed buying Mortgage Backed Securites, Fannie and Freddie), Libor(scandal), and equities (QE and HFT) are being manipulated. Not too many gold bugs deny manipulation any more. The fed could be demanding stipulations for the QE on the primary dealers. Buy only equities, mortgage backed securities, commodities other than those that compete with the confidence of the USD, and so forth.

Inflation is not dispersed

Inflation is not dispersed equally throughout the economy. That's where bubbles come from. Having said that, gold is a hedge against the failure of the currency when confidence is lost or if/when velocity takes off. Also, the real gold market is distorted by the paper markets i.e. ETF's and futures markets. Millions of ounces of gold can be sold short on the futures market, even when the gold needed to deliver is not available to the seller. It is also possible that gold held in ETF's is rehypothecated, or sold more than once. I'm holding.

The markets have -made up mostly of momentum

short term players have grown impatient with gold and silver as the stock market and real estate markets soar

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Michael Nystrom's picture

I agree. Gold is in a bear market despite QE

Look at this long term chart of gold:

http://www.barchart.com/chart.php?sym=GCY00&t=BAR&size=M&v=0...

The high, over $1,900 was hit in mid/late 2011. How many rounds of QE have there been since then? I've lost track.

The deceleration picked up steam mid/late last year - 2012. Gold is now in a full-on bear market.

Why isn't QE lifting gold to new heights?

The assumptions behind that thinking were wrong. Well, they were right for a while, but a new reality is setting in.

The other thing I like to point out is Japan. They're printing like crazy, and yet the Yen is actually getting stronger! Hit bottom and is now coming back up:

http://www.barchart.com/chart.php?sym=J6Y00&t=BAR&size=M&v=0...

That wasn't Japan's Central Bank's intention. Japan's stock market as well is in a bear market:

- - - - -

Bottom line: Central banks printed too much money. In the end, powerful as they are, they won't be able to stave off the forces of deflation. Those forces are too big to control forever.

He's the man.

isnt it possible to stave off deflation by helicopter drops

and massive QE.
With out a central bank controlling the money supply a natural deflation would occur. But since there is a central bank with the ability to theoretically increase the money supply to infinite level, they can stave off deflation and cause inflation

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Michael Nystrom's picture

IF it were a real helicopter drop...

As in Ben dropping $100 bills over Boston. Yes, that would cause hyperinflation.

But that isn't how the Fed does it. They don't actually "print" and this is an important distinction.

If they print, it is out there, forever, in circulation, and prices only go up.

What the Fed does is offer credit. Let's say someone takes that credit, and with zero down, buys a million dollar house. Wow! Suddenly some lucky bank has a new asset worth $1 million! It is the mortgage on that million dollar house. And on that asset, they loan out more and more and more, like banks do.

But then say the buyer can't pay his mortgage. And no one wants that dumb house anymore because it is overpriced and always was. - poof - the $1 million dollar asset gets marked down to 100K. And there are still no buyers, and no one wants it, so the bank is paying people to get rid of it.

That is how deflation works. Yes they can create credit from thin air, but that credit can also disappear back into thin air. Bankers may have control over the former, but definitely not the latter.

- - - -

To increase the money supply, someone has to borrow. At this point, with rock bottom rates, who wants to borrow. You can get a 1 bed condo in Boston for $500K. Are you kidding? That is OVERPRICED. So who is borrowing? Only the Federal Government.

I think the "tapering" may have as much to do with the Fed getting worried about getting its money back as anything else.

Hope that helped.

He's the man.

Credit does not disappear

Whether it's physical, electronic or credit, a central bank does not ever issue money which it does not intend to use. The real 'inflation' is the increase in the money supply, not the increase in price which may or may not be visible depending on actual supply and demand.

Personally, I do not need to see or expect a period of hyperinflation in order to convince me that gold is a wise investment, wiser than US shares. A majority of investors currently see things differently: good for them. That's the beauty of freedom! But do not think that the investment picture is frozen, like Bernanke would like you to believe. It can change at any moment.

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Some more thoughts

Also, concerning bank credit like mortgages, it does not seem right to say that 'credit disappears' simply because the price of houses decreases. It's not right because for every dollar held in bank capital, banks actually distribute credits worth nine dollars or more. So for every one dollar they receive in stolen money from the central bank, they give out loans worth a lot more than that.

Secondly, when the price of houses go down, the one who loses value is the house owner, not the bank. When they give out mortgages, good banks make sure that they cannot lose by requiring a sufficient capital commitment from the buyer and a sufficient collateral. Bad banks just expect the state to bail them out. In both cases the only one who can lose is the house buyer. The fact that the buyer may lose money or his house does not mean that the bank suddenly becomes unable to give out loans. It may well record a small loss of value, but, remember, the value lost actually comes from money that did not exist in the first place.

Anyone can reduce the money supply by throwing money into the ocean. But no-one does it. No-one is throwing 85 billion dollars a month into the ocean to compensate for the 85 billions stolen every month by the Fed. Especially not banks!

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Michael Nystrom's picture

Of course it disappears!

You can't create something from nothing, and expect it not to be able to go back to nothing. That is illogical.

Also, concerning bank credit like mortgages, it does not seem right to say that 'credit disappears' simply because the price of houses decreases. It's not right because for every dollar held in bank capital, banks actually distribute credits worth nine dollars or more. So for every one dollar they receive in stolen money from the central bank, they give out loans worth a lot more than that.

It can all disappear. Including the additional credit they create from the original. What do you think the toxic mortgage crisis was about? Why was the Fed rushing to print? Because the banks made dumb moves and lost all that money by making bad loans.

Secondly, when the price of houses go down, the one who loses value is the house owner, not the bank.

Incorrect. If the house owner put zero down, how does he lose? Even at 20% down, he only loses 20% of the value of the house. The bank gets stuck with a worthless house. Look at Detroit as an extreme example.

When they give out mortgages, good banks make sure that they cannot lose by requiring a sufficient capital commitment from the buyer and a sufficient collateral. Bad banks just expect the state to bail them out. In both cases the only one who can lose is the house buyer. The fact that the buyer may lose money or his house does not mean that the bank suddenly becomes unable to give out loans.

"Good banks" - are there any left? Who? BOA? Citi? These pillars of the American economy are functionally bankrupt. Again - what do you think the credit crisis of 2007 - 09 all about? It was about banks making bad loans and their asset bases collapsing.

He's the man.

Credit contraction

Credit contraction is what some Austrians don't understand. Mises did, but Rockwell, Schiff and a few others keep crying inflation and hyperinflation the whole time the dollar got stronger. Why did the dollar get stronger? What is a dollar exactly? Many Austrians don't include credit in their definition of money supply. Why? Some Austrians do, some don't. Who has been right since 2011? Sure as hell not the Keynesian crowd and some Austrians. Know the difference and understand what a dollar really represents.

Author of Buy Gold and Silver Safely
Next book: Illusions of Wealth - due out soon
Also writing book We the Serfs!