Fed QE Taper And Gold

Wall Street Fed-whisperers universally concluded all this means the formal QE-tapering announcement is happening in early November at the FOMC’s next meeting. They think the Fed will then actually start slowing its bond buying in December. The consensus guess is that tapering will happen at a $15b-per-month or maybe $15b-per-FOMC-meeting pace. The former means fully ending $120b of QE will take 8 months.

$15b tapering is logical because that $120b of monthly QE is split into $80b of Treasury monetizations and $40b of mortgage-backed securities. $15b fits into that well, allocating $10b of monthly tapering to Treasuries and $5b to MBSs. If that timeline holds, there will be another $120b of QE in November and a further $420b during tapering from December to June. So at least $540b of more QE is still coming!

Since Powell’s role in his post-FOMC press conferences is to talk more dovish than the already-dovish FOMC statements, traders reacted to his QE-tapering resoluteness. The USDX caught a sizable bid, so gold reversed sharply to plunge from $1,785 to $1,766. But this metal still ended that Fed Day with a minor 0.4% loss, far better than mid-June’s 1.6% on that previous hawkish dot plot. Gold was holding its own.

Gold rallied overnight into Thursday, clawing back up near $1,775. But during the US session that day as I penned this, gold was hammered sharply lower by what had to be heavy gold-futures selling. Over an hour-and-a-half, gold plunged from $1,770 to $1,750. Very oddly that was despite the US Dollar Index falling a major 0.5% by midday! Gold-futures speculators fleeing again given this backdrop was highly irrational.

Fed money printing, the root of all inflation, is very bullish for gold. This metal’s mined supply only grows on the order of 1% annually. So when the Fed ramps US dollars considerably faster, relatively more of them flood the system and can bid up relatively-less gold faster. If the FOMC actually holds to that QE-tapering timeline Powell implied, again another $540b of money printing is still coming in QE4’s epic campaign.

That’s big alone, a larger fraction of QE1’s total $1,750b, QE2’s $900b, or QE3’s $1,590b. The FOMC effectively announced more QE is still coming that is a third as large as QE3! Gold ought to have rallied sharply on that. Another $540b of QE in the pipeline is even sizable in the context of the epic QE4 bond monetizations. They started in October 2019, accelerating after March 2020’s pandemic-lockdown stock panic.

QE4 has proven mind-bogglingly large, with the Fed’s balance sheet skyrocketing 124.7% or $4,689b over the past 24.6 months! Fully 7/8ths of that came since Fed officials panicked as stock markets plummeted early last year. In the last 18.2 months since March 2020, this profligate Fed mushroomed the US-dollar supply by a jaw-dropping 95.9% or $4,137b! Another $540b during tapering adds another 1/8th.

And the critical thing about QE tapering is it only shuts off the monetary firehoses, it is a far cry from starting to reverse these radically-unprecedented monetary excesses through quantitative tightening. The Fed tried QT years after QE3 in 2018 and 2019, but cried uncle once that monetary destruction started weighing heavily on stock markets. The S&P 500 plunged 19.8% in just 3.1 months in Q4’18, scaring Fed officials.

QT along with the ninth rate hike in the last hiking cycle were increasingly blamed, and Fed officials did not want to risk spawning a negative-wealth-effect-induced recession. I analyzed the Fed’s risky QE4 stock ramp in January 2020, after arguing in late 2018 that Fed QT would prove that stock bull’s death knell. The FOMC’s stomach for tightening fades fast as stock markets crumble into major selloffs fueled by it.

So if stock markets hold up through this QE4 tapering into summer 2022, the Fed’s balance sheet will grow from its current $8.4t right up near $9.0t! Before the FOMC frantically started QE4 within a couple months of prematurely killing QT, that balance sheet ran just $3.8t. Mere QE tapering keeps those vast deluges of new dollars in place, a super-inflationary environment of monetary excess very bullish for gold.

And this upcoming QE4 tapering may not even fully happen. The FOMC will pull the plug fast if US stock markets again plunge into major-correction territory nearing a 20% S&P 500 loss or exceed that to enter formal bear-market territory. As I explored more in last week’s essay, today’s extreme bubble valuations in US stock markets fueled by the Fed’s epic money printing make them very vulnerable to serious losses.

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William K. 2 months ago Member's comment

How about, instead of some slight reduction in purchaes, a "cold Turkey" Halt of the purchases, along with a friendly note to congress that they need to look elsewhere for funds, OR cut back spending. Certainly it would make waves, but tht is OK.