QE Conclusion Is Bearish For Gold

Last year we saw a critical period in precious metals. The 12-year rally in Gold that began in 2000 came to an abrupt end and many investors that looked to the metal as a hedge against inflation and protection against a collapse in the US Dollar Index were forced to deal with significant losses. Bargain hunting investors were able to push prices marginally higher in the early parts of this year, and both the SPDR Gold Trust ETF (ARCA:GLD) and iShares Silver Trust ETF (ARCA:SLV) have seen double-digit gains at some stages.

But is this really a reason to start getting excited for precious metals once again? When we look at the stated policy intentions from the US Federal Reserve, the answer should be a very clear “no.” The latest consumer inflation report out of the US presents additional problems for gold bugs, and it looks at though precious metals should be using rallies as an opportunity to exit their positions while there is still a chance to avoid major losses.

Consumer Prices

The latest economic reports on consumer prices have shown that inflation is rising at a rate that is faster than initially anticipated,” said Rick Bartlett, markets analyst at Orbex. “This means the Fed will need to start raising interest rates and that is an almost universally bearish scenario for gold and silver.” Higher interest rates create a positive outlook for the US Dollar, as there is added incentive for investors to hold the currency for long periods of time. This means we are likely to see sustained upside in the PowerShares DB US Dollar Index Bullish ETF (UUP) once the Fed finally exits its QE programs.

There is less for stock investors to be excited about, however, as the scenario is reversed for the expected performance in the SPDR S&P 500 Trust ETF (ARCA:SPY) and iShares MSCI Emerging Markets Indx ETF (ARCA:EEM). Less stimulus means bigger difficulties for corporations in driving quarterly earnings, and it also means declining expectations for energy demand. So it would not be surprising to see rallies in the United States Oil Fund LP ETF (USO) have difficulty gaining traction.

On the whole, there is little reason to believe that the Fed will backtrack on its planning and keep QE programs in place past the end of this year. Lower prices in gold markets might seem tempting for precious metals investors that are looking to add position exposure at the lower levels seen in the current environment. But now that we have some clarity with respect to the final run in QE stimulus, it is much more likely that we will see further drops. This makes added commodities exposure unwise, as it would essentially mean that investors are just adding to losing positions. A rising rate environment can do little to help gold markets, so it makes sense to take these factors into consideration before adding new long trades in gold or its ETFs.