In fact, Quantitative Easing measures are supposed to be the holy grail of commodity markets. Cometh a QE and the gold bulls rev up, it is widely thought.
Outrageous projections dotted the markets almost on a daily basis in the run up to the third round of Quantitative Easing. But it seems the gold prices have not gone beyond a point subsequent to the QE3 measures. It has not climbed the great plateaus that it was supposed to be. May be a hillock, it has.
Why this has been so?
There are two reasons:
--The gold prices had already been at a high when the QE3 was announced.
--The QE3 is not akin to an atom bomb this time around, blasting of which would pump up enormous amounts of liquidity pressure; but more like a sniper. It spares a bullet a time but definitely serves the purpose.
A look at a rudimentary gold chart will tell you how gold prices have appreciated since the Quantitative Easing measures have been announced each time. The second round of QE, the QE2, saw liquidity to the tune of $600 bn getting injected into the markets in one go. That was a massive bond buying program and took gold to dizzying heights.
And when the prices are at a rational high, it is almost impossible to climb from that levels to further highs given the leverage potential of the commodity and many other factors including psychological. Now, what if the prices are at insane high levels?
The government is not intending to inject massive liquidity at one go into the markets this time around.
The US Federal Reserve intends to buy mortgage backed securities or MBS to the tune of only $40 billion a month. It may also buy treasuries at the end of this year to the tune of $45 billion a month, as Operation Twist comes to an end. Though the figures may sound huge, it is just a drop in the ocean.
The QE3 is open ended and is tied to the labour market figures, meaning the initiative would continue until the $40 billion a month program brings about tangible differences in case of labour market data.
Now, the effect of these measures would require that it takes at least many months before some effect is on the commodity markets and the bullion.
Nevertheless it would happen!
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