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Gold Shines Brightly as Bernanke Adds More QE
Commodities, as defined by Standard & Poor’s GSCI Spot Index of 24 raw materials, have just seen their longest run of weekly gains since 2010. The index has risen for seven weeks in a row. Confirmation of more QE also propelled gold to a six-month high and copper prices to their highest level since May.
The GSCI Spot Index was in a bear market between February and its nadir in June, falling 22pc. Since then it has rallied by 23pc, marking a sharp reversal into a bull market. Of course, a significant amount of the recent rally is down to soaring grain prices, caused by drought in the US and Russia, but at least some of this rise was caused by investors betting on QE.
“Outside of the US, there has also been positive news for commodity markets —signs of a more concerted effort by the ECB to help resolve the EU’s sovereign debt crisis and announcements that China will take steps to kick-start growth,” Caroline Bain, commodities analyst from the Economist Intelligence Unit, said.
“This has led to significant rises in commodity prices in the past month – so much so, that much of the good news could already be priced into markets.”
Equity strategists at Credit Suisse have suggested that QE in itself is not such a strong driver of commodity price inflation – but gains in basic materials prices are a reflection of the impact the process has on manufacturing.
“We think… that industrial commodity price inflation is driven principally by the global cycle, not so much by real rates or excess liquidity,” the Swiss broker said on Friday. “In this context, we would note that post QE1 and QE2 in the US, ISM new orders rose by 40 and 10 points, respectively. In other words, there was a very strong rebound in growth and we would argue that it was this, not QE directly, which drove commodity price inflation.”
However, Credit Suisse also said its modelling suggested that gold could hit $2,000 in the current round of easing, especially as it believes there could be co-ordinated action from other central banks around the world later in the year.
Deutsche Bank sees the Fed’s move as fundamentally positive for gold, but thinks that “there may be some selling pressure once the market has digested the news and as it looks towards the next catalyst”.
However, it thinks the market for gold is now more positive. “We believe that the growth in supply of fiat currencies such as the dollar (and dollar-linked currencies such as the renminbi) are an important key driver, followed by concerns regarding inflation and inflation volatility which could follow,” Deutsche said. “Furthermore, we believe that the low-interest rate environment is likely to continue to enhance gold’s attractiveness given the negligible opportunity cost and longer-term fears regarding adequate stores of value and value/wealth preservation.”
Other industry observers agree. “Within days of each other, the two major western central banks have committed to open-ended asset purchases. This suggests negative real rates and rising liquidity levels are here for the foreseeable future,” according to Ben Traynor, an economist at Bullion Vault, which holds more than $2bn (£1.2m) of gold for clients. “Both have been key drivers of gold’s bull market.”
So, although QE3 may have been priced in to some extent, it looks like commodity prices have further to go.
More easing in the US looks likely to set the dollar on a downward path. Indeed, the dollar index, which measures the greenback against other currencies, has fallen by 6pc since its peak in July, with the falls accelerating. This is positive for dollar-denominated assets. Investors have been waiting for gold to hit $2,000 for quite some time. This year, courtesy of Mr Bernanke, Christmas could come early.