While the Fed’s third round of quantitative easing is fairly aggressive it is unlikely to have a significant impact on the economy – especially if policymakers in Washington lead us over the fiscal cliff. Where QE3 may have an impact, however, is in the commodities market, and in particular gold. Here’s why. Words: 400
So says Russ Koesterich, CFA, the iShares Global Chief Investment Strategist, in an article* posted at http://isharesblog.com.
Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!) and www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) has edited the article below for length and clarity – see Editor’s Note at the bottom of the page. This paragraph must be included in any article re-posting to avoid copyright infringement.
Koesterich goes on to say, in part:
For starters the Fed’s actions:
- may not change the economic fundamentals, but it could continue to support the “risk-on-trade” (assuming we can avoid the fiscal cliff) that we saw following the announcement,
- the rally may last longer, even though it is not clear that QE3 will change much and
- a “risk on” rally would most likely benefit commodities.
Longer term, however, the Fed’s move:
- could support gold in particular.
Historically, the most significant driver of commodity returns:
- has not been the absolute level of inflation or changes in the dollar – the two factors investors typically focus on
- but the level of real-interest rates.
This has been particularly true for gold, which has, at least historically, been the biggest beneficiary of low real rates. The argument why this is the case is not hard to understand:
- In an environment in which real rates are very high, as in the mid-1980s, there is a huge opportunity cost to holding gold.
- Conversely, when real-rates are low or negative as they are today, there is no opportunity cost in the form of foregone interest.
Historically, this relationship has been so strong that since 1990 the level of real rates – measured by comparing the Fed Funds rate to core inflation – explains roughly 45% of the variation in gold.
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Given the Fed’s recent announcement to extend their guidance on holding the Fed Funds rate between zero and 0.25% until mid-2015, investors have an unusual degree of visibility into future monetary policy. In the absence of a slide into Japanese style deflation –increasingly unlikely with inflation expectations actually rising – real-rates may remain negative for many years.
Given this prospect, while the Fed’ s actions may have only a small impact on the economy, they may yet prove a much bigger deal for commodity and gold investors.
Editor’s Note: The above post may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.
Why is it that the demand for gold moves inversely to interest rates – that the higher the rate of interest the lower the demand for gold, the lower the rate of interest the higher the demand for gold? [Let me explain why and what the future seems to hold.] Words: 1053
It is my contention that the price of gold rallies whenever the U.S. dollar’s real short-term interest rate is below 2%, falls whenever the real short rate is above 2%, and holds steady at the equilibrium rate of 2%. Furthermore, for every one percentage point real rates differ from 2%, gold moves by eight times that amount per year. So if the real rates are at 1%, gold will move up at an 8% annualized rate. If real rates are at 0%, then gold will move up at a 16% rate (that’s been about the story for the past decade). Conversely, if the real rate jumps to 3%, then gold will drop at an 8% rate. [Let me explain.] Words: 982
Some gold bugs say that this is only the beginning and gold will soon break $2,000, then $5,000 and then $10,000 per ounce but the question is, “How can anyone reasonably calculate what the price of gold is?” For stocks, we have all sorts of ratios. Sure, those ratios can be off . . . but at least they’re something. With gold, we have nothing…. [or more correctly, had nothing, until the development of my very own model for doing just that. Let me explain.] Words: 945
The return of the Euro debt contagion and drop in the bond markets across the world is pushing interest rates higher and it has investors concerned and rightly so – and nowhere has the concern been more prominent than in gold. [Let me explain.] Words: 759
By looking at the charts and fundamentals for precious metals and the miners it is our firm belief that the precious metals sector has bottomed out and the downside is very limited from here on out. While there doesn’t seem to be an immediate rush back into the sector we believe that the worst is over and that now is a great time to be acquiring physical metals and, more importantly, producers with growth profiles. That’s where we really see the value and upside potential. [Let us provide you with a specific course of action.] Words: 792
It’s that time of the year again where we examine how gold and silver have performed against 75 fiat currencies around the globe.
“Even with the prospect of no QE, if you believe the Fed, gold has not made a new low [since December] so, in my opinion, the absence of QE is priced into gold. On the other hand, if market conditions hit emergency levels, the central banks will be forced to their knees and they will be doing QE by whatever name it’s called. I think at that stage you are going to see gold go ballistic because it will be an admission of failure on the part of policymakers….If investors don’t do something now and take advantage of this funky period we are in, this daily grind of back and forth, they are going to be paralyzed. They will just be bystanders when gold finally takes off.”