Photo: flickr / Maximilian Paradiz
Gold bulls often argue that the yellow metal will only go up as long as central banks continue to employ easy monetary policy.However, this thesis has been around so long that it might not even work anymore.
That’s the gist of what Deutsche Bank suggests in their most recent outlook for precious metals prices. In a note to clients, they write:
Gold trading volumes have tumbled recently as investors supposedly wait for more clarity on central bank policy. This does not mean they are not optimistic. In the latest Bloomberg survey, bulls still outnumbered bears two-to-one, and QE by the ECB and the Fed is currently held up as the next catalyst for rising prices. Indeed, evidence of falling inflation in the global economy, for instance the ebbing price pressures in China, is seen as positive for gold as it removes a barrier to easier monetary policy. So, gold bulls must be mildly frustrated at policymakers’ reluctance to move so far. However, very few dwell on the reasons for this caution, namely the fear QE might do more harm than good for the economy. Mightn’t it do more harm than good for gold prices too? For instance, due to the still diminished risk appetite, QE (in the way it has been conducted up to now) simply adds to the tightness in the safe-haven bond markets. Some money market investors are already facing negative yields and are being made poorer as a result of QE. It is difficult to see how this could be good for gold prices.
QE, or quantitative easing, is when a central bank buys bonds in an effort to lower interest rates.
The idea that QE3 won’t give the stock market much of a boost has become increasingly popular–the same kind of sentiment could infect gold markets soon as well.