Without QE3 Gold Price Isn’t Going Anywhere

In the upcoming FOMC meeting to be held between June 19 and 20 many bullion traders will pay close attention to the FOMC statement and Bernanke’s press conference. If there will be so much a whiff of another stimulus plan it could push up gold price and SPDR Gold Shares (GLD). The last time there was an update in the Fed’s monetary policy was back in January when the Fed had pledged to keep interest rates low until the end of 2014. The price of gold hiked that day. Since then gold price has dwindled. I suspect without another stimulus plan, gold is likely to remain at its current range. Let’s examine the relation between the U.S money base and gold. Also, what are the chances of announcing QE3 in the next FOMC meeting

During last month gold didn’t perform well and declined by 6%. Furthermore, the SPDR Gold Shares (GLD) also fell by 6.3%. Besides the sharp rally of gold during January, the price of gold and GLD have declined since then.

There tends to be a strong relation between U.S. Monetary base and gold price (as I have examined in the past): As the U.S. Monetary base tends to grow, the price of gold tends to rise (From March 2009 to May 2012 the linear correlation between the two was 0.2911). This means if the FOMC will introduce another quantitative easing program in the upcoming FOMC meeting it could rally gold.  

The following chart shows the relation between gold price (monthly average prices) and U.S. Monetary Base during 2011-2012 (up to May). According to the chart, U.S. Monetary base contracted during the last three months which might partially explain the fall in gold price during that time.


Gold Price and U.S Monetary base to Gold Reserve  2011 June 14 2012

One of the key factors in the FOMC members’ decision about issuing another stimulus plan is the progress of U.S economy. The recent U.S employment report sparked renewed speculations around another QE program; But the Chairman of the Fed refereed to the labor market in his testimony: he thinks the situation isn’t dire; the drop in jobs added during the past couple of months is due to warmer weather. He also said it’s due to:

“…some catch-up in hiring on the part of employers who had pared their workforce aggressively during and just after the recession…”

Bernanke also stated the U.S economy isn’t dipping down to a recession:

“Economic growth appears poised to continue at a moderate pace over coming quarters, supported in part by accommodative monetary policy. In particular, increases in household spending have been relatively well sustained.”

On the other hand he also referred to the growing concerns the Fed has towards the debt crisis in Europe:

“…the situation in Europe poses significant risks to the U.S. financial system and economy and must be monitored closely”.

The Greek elections from the weekend could affect the Fed’s future decisions. The risk revolving he European debt crisis is likely to keep occupying the news and the Fed might consider taking actions if needed. I have referred to the potential ramifications of Greece exiting the EU on gold price.

Finally Bernanke also stated in the Q&A section after the testimony that QE may have had diminishing returns. This statement puts another nail in the QE3 coffin. The bottom line: the situation in the U.S isn’t as dire as many think it is; it’s not clear how effective another QE program will be.

The next step will be the FOMC meeting on June 19-20. If the FOMC won’t budge from its monetary policy, and thus won’t announce of another stimulus plan (let alone QE3), gold is likely to remain at its current rate.

For further reading: