Gold advances cautiously in subdued year-end trading; gold and silver no longer a ‘contrarian investment’

(USAGOLD – 12/29/2020) – Gold advanced cautiously in subdued year-end trading as the dollar took a turn to the south and markets, in general, weighed the effects of Washington’s relief package. It is up $7 this morning at $1883. Silver is down 3¢ at $26.28. As mentioned yesterday, while market emphasis has been on the now-signed, sealed, and delivered pandemic relief package, the Federal Reserve has gone about the business of deploying QE4 – a policy many see as having done the lion’s share of work pulling the economy and markets from disaster’s edge.

In this morning’s report, we elaborate on that perception with a couple of charts (see below) that quantify the Fed policy. Two of the most pressing issues markets will need to sort out in 2021 is how the latest round of quantitative easing will play out in the economy and what the effect is likely to be on financial markets, including precious metals. The speculation will undoubtedly add an interesting twist to the annual flood of year-end reviews and new year forecasts.

Crescat Capital’s Kevin Smith believes we are entering a period of across the board currency devaluations that will benefit gold and silver owners. “Analytically minded investors will soon be rotating, if not stampeding, out of expensive deflation-era growth equities and fixed income securities and into cheap hard assets, creating a reversal in the 30-year declining trend of money velocity,” he says in an article posted at the MarketWatch website. “To be frank, buying gold or silver is not a contrarian investment position today,” Smith wrote. “There are enough people in agreement with the idea that all government-backed fiat currencies are doomed to some level of devaluation through inflation due to the level of fiscal and monetary imprudence and unsustainable debt imbalances in the financial system.”

Chart[s] of the Day

bar chart showing Federal purchases of U.S. Treasuries and mortgage backed securities in aggregate since 2008

bar chart showing the change in Federal Reserve purchases of U.S. Treasuries and mortgage backed securities since 2008

Sources:  St. Louis Federal Reserve [FRED], Board of Governors of the Federal Reserve System (US)

Chart note 1: These charts show Federal Reserve combined purchases of U.S. Treasuries and mortgage-backed securities – a policy operation widely referred to as quantitative easing (QE).  We are now immersed in QE4 – clearly identified on both charts’ far-right as the largest operation to date. These charts do not include Fed purchases of corporate bonds – another important component of QE4. The three prior quantitative easings are most identifiable on the bottom chart in 2008, 2010, and 2012.

Chart note 2: You can monitor these charts and many other data sets of interest to precious metals owners at our Monetary Trends and Indicators page. The charts automatically update on a feed from the St. Louis Federal Reserve.

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