Will Bernanke Disappoint Gold Traders at Jackson Hole?

There are renewed speculations around the future steps of the Fed and whether there will be an announcement of another quantitative easing plan in the near future. Last week’s publication of the minutes of the FOMC meeting revealed that the Fed might be closer, than many (including me) had anticipated, to issuing another quantitative easing plan. This news reheated the precious metals markets.

Next month’s FOMC meeting will be highly anticipated. Before that, there is the symposium at Jackson Hole and Bernanke’s speech on Friday. Will Bernanke up the ante and reheat the bullion market in anticipation of another QE program?

The minutes of FOMC meeting was published last week and reheated the bullion market. Many traders hanged on the following statement from the minutes:

“Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery”. 

This statement shows that many FOMC members are leaning towards issuing another stimulus plan, most likely in the form of another quantitative easing in order to jumpstart the economy.

In recent FOMC meeting there were no big surprises and the bullion market didn’t react well to the news from the meetings. The table below shows the gold and silver market reaction following the FOMC meetings. In three out of the four meeting gold and silver prices tumbled the next day.

Gold Silver and FOMC statment August

The U.S economy didn’t show any signs of high inflationary pressures, the current rate of inflation, core CPI, is at 2.1%, which is very close to the Fed inflation target. This eased some of the concerns of the Fed in issuing another QE program that could lead to higher inflation. Especially since QE1 and QE2 didn’t result, for the time being, in a sharp rise in inflation.

Further, the U.S economy didn’t show signs of strong recovery: U.S GDP expanded by only 1.5% during Q2 2012, unemployment declined by only 2 percent points in the past couple of years.

The relation between the money base and precious metals prices was positive in recent years: as the money supply rises, gold tends to rise. I have also showed the strong relation between QE programs and bullion rates. This could suggest there will be another rise in gold and silver, if the Fed will issue QE3. But this could have a weaker effect than the first and second QE programs have.

There are concerns that another quantitative easing plan might have diminishing returns. After all, some think that QE2 didn’t have the same impact on the market as QE1 had.

In recent days the prices of gold and silver didn’t move much as it seems the market is waiting for the next move of the Fed.

The upcoming speech of Bernanke at Jackson Hole titled “Monetary Policy Since the Crisis”.

In the past Bernanke’s speeches were unpredictable: In his testimony, back in June, at the Senate, Bernanke didn’t hint of any QE programs. The following day bullion rates tumbled. But at his speech from March, the Chairman of the Fed rekindled the expectations of another stimulus plan in the near future.

In his upcoming speech there might be some additional hints of the future steps of the Fed but I don’t think this speech will be enough to rally bullion prices.

Further, I don’t think the Fed will announce of QE3 in the upcoming FOMC meeting because, among other reasons, the current political climate in the U.S doesn’t warrant such a shift. Therefore, there is a chance that Bernanke’s speech and the next FOMC meeting could curb the recent rally of gold and silver prices.

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