Gold Fails to React… Again


Just a quick follow up to my post on gold the other day. In that post I wrote that:

In plain English: the chances of the gold price falling substantially is far, far higher than the chances of the gold price rising substantially — the latter of which to me seems almost non-existent outside of some completely unforeseeable event.

Yesterday we got yet more evidence of this. Bernanke’s Humphrey-Hawkins speech was pre-released and analysts are already noting its dovish tone — most notably the return of talk about deflation. This indicates that, should economic conditions worsen, the Fed might not reduce its QE program; indeed, if they worsened enough they might even increase the so-called money printing.

Now, presumably the gold price should react to this, right? Nope. A tiny little bump yesterday which then self-corrected almost instantly.

God bern

This is actually to be expected.  When QE3 was announced back in September of 2012 the gold price failed to react in any meaningful way, as can be seen from the chart below.

gold qe3

This was the first signal I picked up on that the gold market had succumbed to a sort of chronic fatigue. After all, if the reason that the price of gold is supposed to rise is because of so-called money printing and the fear of inflation then why on earth wouldn’t it rise on the back of an announcement of QE by the Federal Reserve?

The answer to that question is simple, and it is precisely the one I gave in my February piece on the matter: the gold market is completely saturated. All the true believers already own their gold and those that lack the faith aren’t interested. That also explains the extremely low price elasticity discussed in my earlier post. When investors do dump gold onto the market no one wants it because the hoarders already have their hoards and no one else believes the hype. This really is a classic end-of-bubble scenario.


About pilkingtonphil

Philip Pilkington is a macroeconomist and investment professional. Writing about all things macro and investment. Views my own.You can follow him on Twitter at @philippilk.
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