Since Ben Bernanke’s announcement of a third Quantitative Easing, QE3, SPDR Gold Trust (ETF) (NYSEARCA:GLD), PowerShares DB Gold Fund (ETF) (NYSEARCA:DGL), iShares Gold Trust (ETF) (NYSEARCA:IAU), and ETFS Gold Trust (NYSEARCA:SGOL), have been on the rise, as investors seek safe havens to hedge against the inevitable inflation.
Additionally Central Banks have also been engaged in their own kind of easing, globally, printing more money, which should “help” skyrocket inflation. However, my biggest wonder is at, the nature in which, people have jumped into the Gold ETFs with an attempt to hedge against inflation. Subsequently, this should be sending Gold prices through the roof, or at least, that is what the myth suggests.
In his book, The Dhandho Investor: The Low–Risk Value Method to High Returns, Mohnish Pabrai coined an investment approach known as "Heads I win; Tails I don't lose much." Q3 2021 hedge fund letters, conferences and more The principle behind this approach was relatively simple. Pabrai explained that he was only looking for securities with Read More
Bank of America Corp (NYSE:BAC) analyst Stephen Suttmeier is quoted in a statement, saying, “we remain secular bulls on gold; key chart and uptrend supports between $1,600 and $1,400 have held, and we have viewed $1,550-$1,500 as a good area to buy gold”. Being a sell side analyst, there is every reason to find a good spot for every investment vehicle, but is Gold all good?
I believe every investment holds the susceptibility to be overrated, and Gold is of no exception. Furthermore, the believe that quantitative easing or printing more money would result in a rally in Gold prices, is unfounded. Everyone believes in this myth, but there is only one fact about QE; it increases inflation rates. And there is also one myth; Gold prices go up.
However, it seems as though investors are buying the former, while completely ignoring the latter. Gold ETFs are soaring since August. Point to note though, I am not saying that the prices won’t go up, it is just that they are not dependent on what happens with QE.
Illustratively, SPDR Gold Trust (ETF) (NYSEARCA:GLD) increased by $2 billion in August, following an influx of investor funds, as signs of QE3 continued to intensify. On the other hand, monthly inflation shot up to 0.56% for the month, as compared to -0.16% registered in July.
Historical inflation rates indicate that a majority of negative inflation rates are experienced during the second half of the year. Since 1953, there have been 46 negative inflation rates in the U.S during the second half of the year, as compared to only 13 in the first half.
On the contrary, Gold prices tend to rise as the year ages, closing at a new high at the end of the year. Gold prices have historically reacted to the forces of demand, which has resulted into short term gains, while the prices revert to the historical trend.
For instance, last year, gold prices hit a high of $1,171 per ounce in September, after beginning the year at $1,356, but closed at $1,652. In July 2010, the prices slipped to $1,198, before reverting to the rising trend in the following month to close the year at $1,390. From June to July 2010, inflation rose from -10% to 0.02% respectively, while last year, inflation dropped from 0.28% in August to 0.15% in September.
So, where is the relationship? Even more recently, monthly inflation for September of 0.45%, is below the August figure of 0.56%, which is contrary to a rise in Gold prices from an average of $1,626 in Aug to $1,744 in Sept. It appears as though the impact of QE3 had already been factored in the August inflation rate.