These Charts Show What’s Likely Next for Gold Prices
Wall Street is celebrating the spectacular fall in precious metal prices. But these new catalysts could force them to revise their gold price outlook higher in the months ahead.
After several years in slumber, gold prices could finally be on the cusp of a spectacular comeback. Precious metals faced downward pressure for years because of unrepentant money printing by the Federal Reserve. The Fed propped up the equities ever since the 2008 stock market crash, so is it any wonder gold prices were deflated?
The fall of Lehman Bros. incited an economic collapse from which we’ve barely emerged. It was the Federal Reserve’s duty to soothe markets. I don’t take issue with that. Ensuring financial stability is part of the Fed’s mandate.
I didn’t even flinch when the Ben Bernanke announced an open-ended stimulus program, whereby the central bank would purchase toxic assets from troubled banks. Bernanke was hitting two birds with one stone; cycling bad assets out of the economy, while also expanding the money supply.
After all, the Fed was buying the assets with dollars fresh from the printing press. Of course, I mean that purely as a metaphor since most money isn’t actually printed. Bankers simply enter a few keystrokes on a computer and voila, the money supply is extended.
However, the Fed’s intervention had a bundle of unintended consequences for gold prices.
Will Analysts Revise Their Gold Price Forecasts Higher?
Precious metals are traditionally used as a safe haven for investors seeking protection against severe economic headwinds. The financial crisis boosted demand for safe havens, causing gold prices to double between 2008 and 2011.
But monetary stimulus was pouring into capital markets on a parallel track from the money that was flowing out. When asset prices stabilized, investors were almost bullish on stocks. They were waiting to see how the Fed would respond, and soon, they received a signal.
The central bank announced it would continue pumping stimulus until unemployment returned to its natural rate. Since no one really knows what the natural unemployment rate should be, markets chose to interpret QE as an open-ended stimulus program.
And here’s what happened to the stock market:
As the monetary base expands, the Dow Jones rises in near-perfect harmony. Could it be clearer? The Federal Reserve artificially inflated the stock market.
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Investors completely abandoned reason at this point. We started seeing traces of the same speculative buying that caused our two most recent stock market crashes. And gold took the hit because of it.
Chart courtesy of www.StockCharts.com
Like I said earlier, I’m not opposed to Fed intervention. Central banks have an obligation to soften the downside of a business cycle, but 2008 was a giant crash, not a gentle dip.
Easy Money Means Strong Gold Price Outlook for 2016
No amount of stimulus was going to revive demand. Markets threatened to crumble without central bank support, making it tougher to end the gravy train.
At a certain point, money printing stopped being part of a crisis management strategy and became a full-blown addiction. If we can’t wean Wall Street of the “easy money” teat seven years after the economic collapse, there’s a problem.
Janet Yellen and her cronies have postponed an interest rate hike twice this year. The Fed’s credibility is hanging by a thread and they must honor the commitment in December. Once they do, Wall Street will have to stand on its own two feet.
Without Fed support, investors will have to rebalance their risk management. Most will look to hedge against a stock market crash, which means a bullish gold price forecast for 2016.