Unlimited quantitative easing, unlimited dollar weakness

The Federal Reserve has initiated an unprecedented level of quantitative easing. In essence the Fed has stated that they will do whatever it takes, for as long as it takes to effectively produce economic stability. Which in turn will lead to a recovery that is as strong as possible, thereby limiting any lasting damage. Concurrently their task is to maintain their target inflation level of 2%.

During a press conference held on July 29 by Chairman Jerome Powell he stated that, “At the Federal Reserve, we remain committed to using our tools to do what we can, and for as long as it takes, to provide some relief and stability, to ensure that the recovery will be as strong as possible, and to limit lasting damage to the economy”.

If you read between the lines the Federal Reserve is committed to an unlimited and infinite amount of quantitative easing for as long as it takes. Currently the Federal Reserve asset balance sheet has swelled by an additional $4 trillion. Also, they continue to add to their balance sheet with expenditures amounting to $120 billion per month.

It is not hard to extrapolate that continued action by the Federal Reserve to add to their balance sheet will continue to create a weaker U.S. dollar. The Federal Reserve amassed a balance sheet of $4.5 trillion by the conclusion of QE 4. In the years following the conclusion of quantitative easing were able to reduce their balance sheet from $4.5 trillion to $3.7 trillion. However, that balance sheet remained and now with the additional purchases totaling $3 trillion in this latest round, the Fed’s balance sheet is now closer to $7 trillion. Another distinction between the 2008 financial crisis and the global pandemic is the massive amount of aid that was needed to help keep the roughly 30 million unemployed individuals in the United States solvent. To date the United States Treasury Department has spent an additional $3 trillion.

The actions by the United States Treasury Department and the Federal Reserve have been in unison with the other major central banks reacting in a very similar manner providing liquidity, near zero interest rates as well as aid to its citizens in need. The net result of these combined actions has been that the majority of core currencies associated with the major central banks have been greatly devalued. Collectively this devaluation has created tremendous tailwinds for gold and silver pricing to ascend to higher values regardless of the currency it is being paired against.

While there is a huge push by multiple companies to produce a vaccine, and the technology to reach that goal has become increasingly streamlined to shorten the timeline. Currently many medical experts believe that a viable vaccine will not be available till the end of this year, and maybe even as late as next year.

Until the pandemic runs its course central banks are doing little more than putting a finger in the dike. The truth is that central banks have no preconceived idea of the expenditures that will be needed to stabilize their country’s economy. Even less of an idea in terms of the time needed to effectively stabilize the economy and then begin rebuilding.

With that in mind it is quite understandable that both gold and silver have been gaining value at a nearly exponential rate. Investors are so hungry to allocate more capital from their portfolios in the safe haven asset class. As such any recent price dips have been met with market participants bidding both gold and silver higher. While most analysts are forecasting that both gold and silver will continue to trade higher there is a wide range of forecast targets. In the case of gold, we are in uncharted territory so the formula to forecast how high gold could go becomes extremely difficult.

That being said it seems highly unlikely that gold will not move to higher pricing by the end of the year. Currently our technical studies are forecasting that gold could reach anywhere between $2200 and $2300.

Wishing as always, good trading,