Here’s Why Soaring Gold Prices Could Mean QE4

Gold_Prices_Interest_RatesSoaring Gold Prices Hint Interest Rate Hike is Off the Table

Gold prices staged an impressive rally this week as Tuesday’s uplift in the spot rates for the yellow metal built on Friday’s negative U.S. economic reports.

Gold bullion surged upward to $1,153.12 per ounce as analysts and investors alike began throttling back expectations of a looming U.S. Federal Reserve interest rate hike in 2015. Gold bugs breathed a sigh of relief after U.S. Labor Department Statistics indicated that only 142,000 jobs had been created in September, which fell significantly short of the estimated 203,000. (Source: Platinum Futures Rise to Two-Week High as Supply Concerns Mount, Bloomberg, October 7, 2015.)

The gold price had previously hit a miserable five-year low in July. However, it has posted an impressive rally as the Chinese stock market crash, turbulence in emerging markets, and spotty U.S. economic reports continue to reduce the chance of a Fed rate hike this year. Gold bullion has in fact not sold above the $1,150.00 per ounce resistance since September 24th.

Compounding the pessimistic market atmosphere is a damning report from the International Monetary Fund (IMF), which reduced the forecast for global economic growth for 2015. (Source: IMF Downgrades Global Economic Outlook Again, Wall Street Journal, October 6, 2015.)

With such a soft economic outlook for this year and into the next, is it any wonder that the Federal Reserve is hesitant to raise interest rates?

The Outlook for Gold Prices is Incredibly Bullish

While these indicators may not bode well for the rest of the economy, gold prices have been given new life as wider bearish sentiments begin to seep into the markets. Gold futures for December 2015 delivery shot up by approximately $10.00, or one percent on Tuesday.

Gold prices tend to have a strong negative correlation with both the U.S. dollar and bond yields, and the dollar quite predictably fell to a three-week low on Tuesday as gold surged.

USD_6Oct15_Chart

Chart courtesy of www.StockCharts.com

What is really keeping gold prices within a narrow range is that markets are dominated by two types of investors. The first group prefers to steadily build up their gold positions over the long term, appreciating the yellow metal building up value over time. The second group believes that the Fed will be raising the interest rate and remains bearish on gold bullion because they feel that higher interest rates will make gold less attractive for investors. This tension between the two camps is exacerbated by the artificial depression created by the paper gold market.

With gold prices rising on the latest market news, it appears that the gold bugs are finally having their day.

Why are Analysts Reigning in Their Gold Price Forecasts?

There are two reasons for which gold bears maintain that gold prices will not rise. The first is the ever-present threat of a Fed rate hike, which they feel will cause gold prices to tank. The second is that gold prices did not rally after the last round of quantitative easing measures. Neither of these is particularly convincing, and here’s why.

The reality of the situation is that the gold bulls will more than likely win out over pessimists. Friday’s negative data is essentially the first indicator that something is very wrong with the current economy, and it’s likely we will be seeing more of the same once more data comes out in November. If weak labor statistics keep on coming, we won’t be seeing rate hikes anytime soon. What will probably occur instead is that the discussion over interest rates will shift from a distinct possibility to a non-issue, replaced by the need for more quantitative easing.

It’s at this point that a gold bear would point out to me that during the last round of quantitative easing—QE3—there was no gold price rally. So why would a looming QE4 have a different outcome?

The difference here is market sentiment, which is fundamentally different this time around. When the U.S. Federal Reserve last announced quantitative easing measures in September 2012, there was a widespread belief that it would be the final time. Psychology played a vital part in investors’ assumptions that QE3 would give way to a rate hike tightening cycle, finally putting the nightmarish 2008 financial crisis to bed.

But that certainly isn’t the case this time, and it’s because there is very little positive economic data to indicate that the Fed will be raising the rate.

What’s the Bottom Line for Gold Prices?

The myth of a coming Fed interest rate hike is slowly evaporating, and the first signs of a broader psychological shift in global markets are now being seen in the upward movement of gold prices. A savvy investor would be wise to take a serious look at gold prices and make their own conclusions.

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