Gold is Reacting to News About QE3

As Wednesday Fed decided to maintain the Quantitative Easing Program in place, we could see the American dollar dropping but indices as DAX, Standard & Poor’s 500, Nasdaq and Dow Jones Industrial Average reaching historical highs. This decision was felt and integrated in the price of gold. Since Ben Bernanke announced a possible change of the stimulus program, we saw the price of gold increasing at a steady pace.

Since the beginning of 2013, gold lost nearly 20% anticipating a reduction in the stimulus program but starting with June, when the possible tapper was announced, gold start climbing, like it encapsulate the uncertainty and lack of trust of the investors, and clearly indicating the continuity of the QE3. Also, Lawrence Summers’s withdrew as a candidate to head the Federal Reserve made the gold climbing as a proof that Janet Yellen has now more chances to assume Ben Bernanke’s responsabilities and to continue the unconventional monetary policy.

If Fed will cut the stimulus, gold is expected to get on an increasing trend, reaching $1400 per ounce while if the stimulus is maintained, gold will oscillate at lower values, most probably respecting the boundaries of a range. Even if by the end of the year the FOMC will meet again, there are poor chances to see the QE3 tapered. Most probably, the decision will be taken by the new chairman of Fed which will integrate the decision in a new strategy to run the American economy.

As St. Louis Fed’s Bullard delivered a speech later today, he expressed his view regarding the stimulus program which is effective and benefic for the economy. He doesn’t see any problem in having Yellen as head of Fed. Also, the fact that the QE3 wasn’t tapered at the last meeting isn’t a surprise for him who doesn’t expect this decision to be taken by the end of this year. Even if they would have decided to taper, $10 billion would have made a difference, in his opinion.

The Quantitative Easing Program Remains in Force

The FOMC decided to wait and hold  the QE3 in place at a pace of $85 billion per month. Apparently, the economy of the United States is not ready to quit the stimulus, decided the FOMC members by a 1-to-9 vote. Indeed, the data below expectations coming from the labour market influenced the decision took today and Ben Bernanke gave assurances that the progress of the economy  is basically deciding whether or not the QE3 will continue to run or not.

Likewise, the interest rate is going to remain at low levels with no changes on the long-term. The “no tapering” indicated an economy still fragile, then add the fact that the Fed is revising down its economic growth forecasts, seeing  growth between 2% and 2.3% this year, down from 2.3% to 2.6%. Even if the program is being maintained, it doesn’t mean that it failed to deliver results, just that a better recovery of the economy is needed.  As an example, since September 2012 when the QE3 started, the jobless rate fall from 8.3% to 7.3%, a substantial improvement but still above the targeted percentage. As there are no worries about inflation which this year is expected to vary between 1.2% and 1.3%, the Quantitative Easing program will continue to support the American economy as long as needed.

Tomorrow FOMC Will Decide QE3′s Fate

Tomorrow is the much awaited day, when chairman Ben Bernanke will expose his decision concerning the evolution of the third Quantitative Easing program that has been implemented for one year, so far. Everybody’s eyes will be on Fed’s chairman and for sure the markets will be highly sensitive to each word delivered.

The big question is: will the QE3 be reduced now? Or later this year?

Most of the investors, and also most of the surveys conducted by Reuters and Bloomberg are pointing towards a contraction of $10 billion that will be announced tomorrow, but the amount may vary between $5 and $25 billion. Tomorrow are expected forecasts about the American economy for 2016 and it will be interested to follow the way they will treat the fact that in January 2014 Ben Bernanke will no longer lead the Federal Banks of the United States. Janet Yellen is the favorite so far, but we have to be careful to any possible surprises.

Even if economists believe that Yellen’s approach will be almost the same as the one of Bernanke and another chairman will make radical changes, we cannot expect this scenario to happen. Giving the size and importance of the QE, no matter the chairman, decisions will be taken in the best interest of the American economy. Thus, tapering will happen gradually and further changes will be made according to data coming from the labor and housing sectors, in particular. Anyhow, the difficult part of the process of strengthening the economy just now is coming, and the next chairman will have to be able to control the situation in a proper way.

Both gold an silver’s futures dropped in anticipation of the decision that is coming tomorrow, investors preferring to wait. As it concerns the price of gold, it is expected to further decline until the end of this year. Same for the emerging markets, which are already feeling the effects of the “absence of QE” due to the considerable decrease of inflows of money.

Tapering QE3 Challenges the Whole World

As the time of modifying the Quantitative Easing program is nearing, the possible effects started to be analyzed. Jackson Hole Symposium was the main event of the last days as central bankers, finance ministers, academics, and financial market participants from all over the world gathered to discuss the most important issues of the actual economic situation. Even if the man with the answers (Ben Bernanke) missed this event, other important persons came to draw a warning signal. Thereby, we can list Christine Lagarde, Janet L. Yellen and Haruhiko Kuroda.

Another worry that was added to the existing basket of problems is the way that QE3 influences countries from around the world. In the context of tapering this program, emerging markets could be affected. It’s true that the countries that have supported unconventional monetary policies have also been able to maintain a balanced economic climate and financial stability, and the whole system get used with this pulse, but stopping a program that calmed an entire world, may stir things up. This is what Christine Lagarde suggested and tried to draw the attention on the necessity to find the best way to make this change. On one side U.S. is doing well, making its economy to go more fast offers it the power to interrupt this program, while emerging countries have to deal with these circumstances and find solutions to face new challenging conditions.

Somehow or other, the “September moment” was also confirmed by Jackson Hole Symposium. Ben Bernanke wants to see its job finished until he ends its mandate and the current economic conditions seem to offer him the right moment to end his plan. On the other side of the ocean, the Europe and Japan may still enjoy the ultra-easy monetary policies they have already integrated so far.

FOMC About To Change Its Perspectives

As Willian C. Dudley indicated in his last speech, the FOMC members decided that the time to discuss the tapering of the QE3 program has come. Even if there are still doubts concerning this decision, FOMC members decided that risks of an economic downturn have diminished since the Fed started to run this bold program. Yesterday, Moody’s Investors Service started the positive data string with revising its outlook to stable from negative, decision that has been postponed for 5 years before being implemented.

The decision of the rating agency doesn’t necessarily reflect a real improvement of the economy. Actually, it reflect an impulse given to an economy that recovers at a slower pace that before (the labour market started to recover, but not as expected). Economists keep being positive and expect an improvement in the second half of this year, but is difficult to ignore real facts that make these expectations difficult to be accomplish. Thus, high prices on oil, slow growth in exports and increased mortgage rates represents factors that will most probably lead to a poor growth of the economy. Concerning the outlook for the inflation, the  oppininons are devided. The highly accommodative monetary policy supproters (that now had remained less) believe that the inflation is far from reaching the target, while other oppinions are reflecting big expectations about a suitable inflation in short time. Follow the reports on the U.S.’s economy for the next short term in order to understand if the QE3 will be reduced by the end of this year or by the middle of 2014 but, in all cases, this program will be over soon.

Which is the position of St. Louis Fed’s Bullard?

Everybody is speaking about the tapering of the Quantitative Easing program, but nobody has any concrete and reliable piece of information. If we are to consider the macroeconomic indicators that describe the U.S.’s economy, it is difficult to take any position. The data is mixed. On one hand, the labour market seems to be giving real signs of improvement, on the other hand, we cannot trust only one set of data. An information that can be trusted is the FOMC Member Bullard’s speech. It looks like between the FOMC members, the only measure which was discussed so far, about the tapering of the QE3, is the starting of discussions about possible plans for reducing the pace of asset purchases. Another thing that we know for sure, is that no final decision will be taken unless the end of the year will meet the same positive results that were met at the end of the first half of 2013. In the best case scenario, the September’s meeting might bring a set of pans, which will be implemented next year, according to the economic conditions.

The main findings of the Bullard’s speech are the following:

- Any decision concerning the Quantitative Easing program is separated from any decision concerning the policy rate;

- There are discussions on whether or not a wider range of labour market indicators need to be taken into consideration, decreasing the importance given to the present key indicators ( the unemployment rate and payroll employment growth);

- FOMC will have to decide if, in taking any tapering decision, it is important to consider the weak evolution of the GDP (starting with the beginning of 2013) or is better having sight of the future evolution, which is expected to be improved, and to trust this presumption?

- The size of the Fed’s balance sheet might pose questions about the most appropriate moment of tapering;

- The inflation is low. In such an environment, the FOMC might remove the policy accommodation;