Quantitative Normalization Continues Driving Gold Lower

The fact of the matter is that most market participants are acutely aware of the fact that the strategy of quantitative easing has ended and no longer guides the Federal Reserve’s monetary policy.

In reaction to the devastating recession which began in 2008, which was directly attributed to the banking and mortgage crisis, the Federal Reserve began a series of steps to revitalize the United States economy. Their quantitative easing policies spanned over multiple years and were labeled QE1, QE2, and QE3.

In November 2008, the central bank responded to the banking crisis by implementing a program of quantitative easing in which they would purchase financial assets and effectively lower interest rates. The first phase of this program was known as QE1. During this period the Fed purchased over $600 billion worth of mortgage-backed securities. By the end of QE1, in June 2010, the Fed had increased their balance sheets by $2.1 trillion through their purchases of treasury, mortgage, and other securities.

By the conclusion of the Fed’s quantitative easing program, the Federal Reserve had amassed a balance sheet of approximately $4.5 trillion in assets.

Gold was trading just above $900 in November 2008. At the end of QE1 in June 2010, gold prices had surged and now had a value in excess of $1,150 per ounce. By the time QE3 had begun gold pricing had surged to its all-time record high just above $1,900 per ounce.

In June 2013, the Federal Reserve announced that they intended to taper the stimulus efforts as a direct result of the increased ability in the U.S. economy, progress in the job market, and a steady inflation rate. By October 2014, the Federal Reserve completed and ended their quantitative easing program.

What followed was a strategy to begin to reduce the balance sheet of the Federal Reserve’s $4.5 trillion balance sheet in conjunction with small and incremental hikes in interest rates. This started the Fed policy of quantitative normalization. It is this strategy which guides the Federal Reserve’s monetary policy to this day.

The Federal Reserve has been quietly reducing its balance sheet and has raised its fed funds rate to between 1.75% and 2% through a series of small and incremental rate hikes. The Federal Reserve’s quantitative normalization strategy continues to this day with balance sheet reductions of assets and interest rate hikes.

As interest rates have moved higher, we have seen the US dollar index gain value. Recent gains in the dollar index have had a direct impact on gold, taking prices lower. This trend could remain intact until the process of quantitative normalization has run its course. Therefore, we could see continued pressure on gold taking prices lower.

Wishing you as always, good trading,