As we near the end of another Fed stimulus, there is much speculation about how the gold market will respond. The previous program, Operation Twist, produced the expected results for stocks and treasuries, but had an unusual impact on gold prices.
According to data from Eric Parnell published in Seeking Alpha, stocks typically perform well when infused with stimulus. As a result, investors are drawn away from the perceived security of treasuries, causing their returns to plummet. When the stimulus is withdrawn, stocks decline and treasuries soar.
|
Program
|
Time Frame
|
Stocks
|
Treasuries
|
Gold
|
|
QE1
|
3/09-3/10
|
4.30%
|
-0.88%
|
1.43%
|
|
None
|
4/10-8/10
|
-2.18%
|
5.35%
|
2.65%
|
|
QE2
|
9/10-6/11
|
2.35%
|
-1.05%
|
1.90%
|
|
None
|
7/11-9/11
|
-5.94%
|
10.02%
|
3.31%
|
|
Operation Twist
|
10/11-
|
4.28%
|
-1.61%
|
-0.11%
|
However, gold continued to produce strong positive returns until Operation Twist, by which time it had surpassed the returns of both stocks and treasuries. Interestingly, gold’s recent lackluster performance corresponds with a significant drop in treasuries during this latest round of stimulus.
While Operation Twist still has a couple of months to run, the results thus far suggest that investors have developed a stronger appetite for risk. However, this is not necessarily good news, as there has been no improvement in the long-term economic outlook.
In the past, the end of Fed stimulus has led to significant market declines. After QE1, stocks plummeted and investors sought safety. This prompted the Fed to introduce QE2 just five months later. When QE2 ended, the response was even more significant, leading to the introduction of Operation Twist, which was essentially a third round of quantitative easing.
Given the strong possibility of double-digit monthly declines in the stock market, there is every reason to expect that the end of Operation Twist will be even more profound. The Fed may face enormous pressure to swiftly introduce another round of stimulus. Regardless of the Fed’s actions, investors are likely to be cautious, as they have seen the impact of stimulus measures in the past. In this environment, the gold market may rush to make up lost ground.
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