Last Friday’s 3.9% jump in the price of gold is significant not only because it occurred while most other markets were falling, but also because the yellow metal could be signalling the imminent arrival of global, coordinated QE.
Gold bucks the trend
The almost 4% jump in the price of gold occurred on a day when most other markets fell significantly. Continued fears of a European banking crisis and renewed global recession caused the FTSE and Dow to close down more than 1% and 2% respectively, while key commodities such as oil and copper also fell sharply.
Gold’s sharp reversal looks to have been triggered by aggressive buying which forced short sellers to cover their short positions and go long. It will likely be a number of weeks or months before we discover the true origin of the large buy order/s (if indeed we ever do), but my guess is that they came from a large central bank such as the People’s Bank of China (POC).
China has $3.3 trillion of foreign currency reserves, 60% of which are denominated in US dollars. It therefore has a huge incentive to move out of US dollar (as well as Euros, Yen etc.) and into an asset that cannot be devalued via the printing press, i.e. gold.
Chart courtesy of Stockcharts.com
The chart above shows gold’s recent bottom at $1,526.70, and subsequent one-day rally back above $1,600. The spike in volume that accompanied the rally is typical of a short-covering rally and is caused by bearish traders buying gold to cover their short positions.
Gold stocks are also in rally mode
Another thing that is significant about gold’s recent rally is that the shares of gold and silver miners have also rallied strongly. Since 16 May the HUI gold stock index has risen more than 21%. This means that for the first time since March gold stocks are acting like gold stocks, i.e. derivatives of the metal, rather than just general equities.
Gold’s rise could signal imminent QE
In addition to being good news for holders of gold and gold equities, gold’s recent spike could be a signal that more QE is imminent.
The fact is, austerity and debt deleveraging are inherently deflationary, and there can be little doubt that deflation is quickly becoming the dominant force within the global economy and financial markets. Therefore, if world leaders want to avoid a second global recession/ depression (and I think it’s safe to say that they do), then we can expect a policy response in the form of additional inflation, i.e. QE, money printing, bailouts, stimulus spending, etc.
It is my contention that gold buyers are seeing what I see and are buying gold preemptively.