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Does More Monetary Stimulus Mean Higher Gold Prices?
Central bank charts of gold prices & stimulus initiatives since Sept. 2011 set the record straight

By Nico Isaac
Wed, 30 Jan 2013 17:45:00 ET
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Ask any mainstream economist worth his or her salt about the relationship between central bank monetary policy and precious metals, and you'll probably hear something like:  

Stimulus is to gold prices what doping is to Lance Armstrong's cycling speed. Stop the money printing and low interest rates, and you significantly slow down gold's gains.
 
This widely-held notion recently reared its head on Jan. 30, right before the "market-moving" meeting of the Federal Reserve's Open Market Committee. With no end to the Fed's accommodative bias in sight, the usual experts likewise see no end to gold's uptrend.
 
"Gold Firmer Ahead of Upcoming US Federal Reserve's Monetary Policy Decision. The policy makers' caution toward the economy suggests that the stimulus measures are unlikely to be taken away any time soon, which will support gold prices." (Reuters)
 
Are they right? Is there a correlation between monetary easing and rising gold prices?
 
Well, look at the first chart below. It shows the performance of gold since hitting an all-time high in Sept. 2011. Considering the lackluster action over the last two years, you might assume the world's leading central banks have been asleep at the easy-money wheel.
 
 
 
The second chart, however, shows that it just ain't so. Here, we plug in the major stimulus initiatives on the part of the U.S. Federal Reserve and Bank of England since Sept. 2011. Each incident is also explained in depth:
 
 
 
·         Sept. 21, 2011: Federal Reserve launches "Operation Twist." The central bank swaps $400 billion of short-term bonds for the same dollar amount in longer-dated securities. Deadline for program is slated for June 2012.
 
·         Oct. 2011: Bank of England initiates new round of quantitative easing, creating an additional 85 billion pounds in stimulus.
 
·         Nov. 2011: The Federal Reserve pledges to "leave the door open for further action" and to keep interest rates at record lows "at least through mid-2013."
 
·         Jan. 2012: Federal Reserve pledges to "keep interest rates near zero until at least late 2014."
 
·         Feb. 2012: Bank of England adds an additional 50 billion pounds to stimulus program
 
·         June 2012: Federal Reserve extends "Operation Twist" to the end of the year, swapping an additional $267 billion of shorter-term securities for 6-to-30-year Treasury's.
 
·         July 2012: Bank of England adds an additional 50 billion pounds to stimulus program, bringing the total to 375 billion pounds.
 
·         September 2012: Federal Reserve pulls the trigger on a third round of quantitative easing, QE 3. The new, $40 billion per month bond purchasing program of mortgage-backed securities is open-ended, with no time limit.
 
·         The Fed also vows to "maintain the Federal Funds rate near zero until at least through 2015." The Huffington Post coins the two-sided bailout "a double-barreled blast of stimulus."
 
Before you climb on the gold bandwagon, make sure your analysis says the parade is "safe."
 
 

 
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