In my previous article (What if the Fed Really Tapers QE?) I focused on what would be the likely outcome of limiting the QE program on several key markets (gold, real estate, stocks and bonds). Today, we will provide you with an analogous analysis for a completely different scenario.
In the following part of the article we will discuss what’s likely to happen if the Fed simply continues the QE program and informs about it in a direct way.
In short, you will find details in the table below – the above scenario is listed as #1 in the table below (last week’s analysis focused on scenario #4).
| Fed program | Fed communication | Probable outcome for gold in the medium run | Influence on | Probability | ||
|---|---|---|---|---|---|---|
| Real estate | Stocks | Treasuries | ||||
| Continuation | Continuation | Likely to be higher | Upward pressure | Upward pressure | Depends | Most probable |
| Continuation | Change, because of positives | - | Unclear | Upward pressure | Upward pressure | Probable |
| Continuation | Change, because of negatives | - | Downward pressure | Downward pressure | Downward pressure | Probable |
| Freeze | Freeze, because of positives | Likely to be lower | Upward pressure | Upward pressure | Upward pressure | Probable |
| Freeze | Freeze, because of negatives | - | Downward pressure | Downward pressure | Depends | Least probable |
| Reduction | Reduction, because of positives | - | Downward pressure | Upward pressure | Unclear | Probable |
| Reduction | Reduction, because of negatives | - | Downward pressure | Downward pressure | Depends | Least probable |
| No-change change | New weapons | - | Upward pressure | Upward pressure | Upward pressure | Most probable |
The first case seems most probable based on the recent minutes (from 30th-31st of July; the minutes were published on the 21st of August). The Fed is likely to continue the programs, and communicate the message openly without any misinformation. Such scenario is indeed the likeliest one since despite negligible positive signs the economy has not improved sufficiently. The decision will put upward pressure on real estate, since holding on to Mortgage Backed Securities by the Fed should keep up the boost (however inefficient it may be).
In this scenario, the banking system will be covered from liquidity problems, and indirect subsidies to the banking system will be continued. The stock market should therefore grow. What happens to Treasuries? It depends mostly on inflationary expectations. In the short run we should say that Treasuries would gain because one of the main buyers, the Fed, would keep them. Nevertheless, there is a possibility that they will lose value if the market expects this type of policy to lead to inflation. In this case, the Treasuries could go down. However, possibly the Fed would step in again with some other tool to counter that (such as with the “operation twist”). There are limits to such steps, of course. However, as we mentioned last time, we do not see very high inflation on the horizon. So far...
Gold should be on its upward track within a few months (if not sooner), because upon the continuation of the intervention it will probably be considered a good dollar alternative, an anti-system hedge with the proper backup in the physical market.
Summing up, if the Fed continues the QE program and it is communicated directly, gold is likely to move higher within a few months. The full version of this report includes our analysis of 8 different scenarios (as you can see on the above table). We recommend that you stay prepared almost no matter what the Fed does by reading the entire Market Overview report. You can sign up here.
Thank you.
Matt Machaj, PhD
