Shot Up From Slightly Above 2 Percent To As High As 10 Percent

The repo crisis clearly shows that liquidity is substantially lower, while risk and debt accumulation higher than estimated. Market players have to be more leveraged than previously thought and thus reluctant to take more risk and lend cash against Treasuries at the current ultra-low level of interest rates. Who knows: maybe this is the beginning of the burst of the bond bubble?

Anyhow, problems accumulate and the Fed is likely to resume the quantitative easingPowell does not, of course, want to admit it. At the September press conference, he mumbled something about "assessing the question of when it will be appropriate to resume the organic growth of our balance sheet." On October 8, Powell promised that "my colleagues and I will soon announce measures to add to the supply of reserves over time." However, he added that "this is not QE. In no sense is this QE."

He is right in one thing. The scale is smaller. As one can see in the chart below, under QE1, the Fed bought securities worth around $1.2 trillion over eight months, or about $150 billion per month. Now, the US central banks conducts $75 billion repo operations. But it has very little to do with organic expansion. In the four year prior to the Great Recession, the Fed's balance sheet was increasing by about $2.6 billion per month on average. So, if it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck. If the recent expansion of the Fed's balance sheet looks like quantitative easing, it is quantitative easing, and not 'organic growth'.

Chart 1: Fed's balance sheet from January 2003 to October 2019.


What does it mean for gold prices? The next round of QE should be supportive for the yellow metal. You are right that not all rounds were positive for the bullion. For example, the QE3 increased confidence among investors and sent gold prices lower. However, the upcoming expansion of the Fed's balance sheet will occur in the period of high trade uncertainty and elevated recessionary risk. So, it should be more supportive for gold, especially if it translates into weaker U.S. dollar (which is, however, not so certain, given the sheer scale of various monetary operation of other major central banks).

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If you enjoyed the above analysis and would you like to know more about the fundamentals of the gold market, we invite you to read the November 


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