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Who Still Believes The Fed Controls Gold Prices?

Gold Prices
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EDITOR NOTE: This article points out a simple truth that applies to just about any fundamental measure relating to interest rates. When the Fed raises or lowers interest rates, things that are positively or negatively correlated don’t always march in lockstep with the Fed’s actions. When interest rates are lowered, demand for riskier assets don’t just magically appear; the same can be said for demand in safe-haven assets. The market doesn’t move in a mechanical fashion. Economic movement can be fuzzy, as human sentiment and speculation make the markets messy. So, gold began rising while the Fed was hawkish; and now that the Fed is taking an exceedingly dovish and pro-inflationary stance, gold underwent a correction. Ultimately, it’s the long-term that counts. And going back 50 years, with the dollar and gold both having seen numerous fluctuations in response to Fed actions, the fact remains that the dollar has lost 83.5% of its value while gold has appreciated 932%.

According to mainstream economic wisdom, there are three certainties in life: Death, taxes and the Federal Reserve being Geppetto to gold's price strings. One way the Fed allegedly controls gold is:

An increase in rates and decrease in stimulus leads to falling gold prices.

But that's not the Fed we've come to know since the coronavirus pandemic began in March 2020. That Fed has embraced a dovish policy of low rates and increased stimulus -- which supposedly caused gold to shine

  • "Gold Climbs on U.S. Stimulus Outlook, Fed Bets" (Dec. 14 Bloomberg)
  • "Gold Rises on U.S. Stimulus Plans, Dovish Fed Stance" (Jan. 14 Reuters)
  • "Gold Gains on Dovish Comments from Fed's Powell" (Jan. 13 CNBC)

One Jan. 5 FX Empire even assumed that gold's future is squarely in the hands of the U.S. central bank, asking quote "Will the Fed Support Gold Prices in 2021?"

"Gold ended 2020 at $1,891, partially thanks to monetary policy easing. In 2021, the Fed may not trigger a comparable rally in gold, but it should offer gold prices some support."

Many investors accept this idea as fact because they hear it repeated again and again. But we can show this notion is simply not true.

Take a look at this chart of gold prices since 2011: (source: Goldprice.com)

You can see that from 2011 to December 2015, gold prices plunged 40-plus percent to 6-year lows. By mainstream logic, gold's freefall would have coincided with a hawkish Fed.

In fact, it was the opposite: from 2011 thru November 2015, the Fed left interest rates at their lowest-ever level near .25-.0%, until it raised rates in December 2015.

In addition, 2011 thru 2014 was during the years of "quantitative easing," when an estimated $4.5 trillion in stimulus was injected into the markets and economy. Said one October 30, 2013 CNN Business:

"Call it QE-Indefinitely. The central bank has been buying $85 billion in bonds every month since September 2012, and has said it will continue to do so until the job market improves "substantially."

"If these predictions come true, this round of QE is likely to total more than either of its two predecessors... There's still no end in sight for the Federal Reserve's stimulus program."

Conversely, consider the period from December 2016 thru August 2019: gold was mostly higher, as prices pushed to a 6-year high. That's the sort of price action which suggests a dovish Fed -- right?

Nope! During this time, the Fed RAISED rates 8 times -- and QE had long been retired: (circa: Oct. 2014)

Originally posted on Elliott Wave

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All articles are provided as a third party analysis and do not necessarily reflect the explicit views of GSI Exchange and should not be construed as financial advice.

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