White Paper Explores Impact of Quantitative Easing Programs
“During the financial crisis of 2008, the U.S. Mint experienced a surge in sales of its gold bullion coins. The demand was so strong that the Mint had to cancel production of its proof version of the Gold American Eagle in 2009 to conserve gold blanks for bullion.”
Chairman Ben Bernanke announced Wednesday that the Federal Reserve will continue its QE programs, adding another $1 trillion to the economy before tapering off late next year: “With unemployment still elevated and inflation below the [Federal Open Market] Committee’s longer-run objective, the Committee is continuing its highly accommodative policies.”
Markets immediately responded, just as they did following Bernanke’s May 22 testimony to Congress when, after suggesting the possibility of the Fed pulling back bond-buying programs later this year, financial markets around the world experienced dramatic decline. The paper cites the far-reaching impact of such comments as indication of the widespread unease surrounding the cessation of the stimulus. The paper goes on to note global economic conditions that validate this concern, explaining how “In just the past month, Japan’s Nikkei stock index has crashed 20 percent, owing much to the quantitative easing program they have in place.”
Referencing the 2008 financial crisis, as well as other past stock market crashes, the paper identifies the potential benefit to commodities like gold and silver if another severe downturn occurs. “Data from previous economic downturns indicate a trend in not only the price of gold, but also in the demand for physical gold during times of crisis,” said U.S. Money Reserve’s Mark Fertitta, secretary. “At the beginning of the 2008 crisis, the price of gold increased 28 percent in less than four months, and overall demand was up 64 percent that year.”
These numbers reveal, as the paper points out, the tendency for people to buy gold based on financial uncertainty in the future. Further demonstrating this phenomenon, the paper notes sales trends from the U.S. Mint: “During the financial crisis of 2008, the U.S. Mint experienced a surge in sales of its gold bullion coins. The demand was so strong that the Mint had to cancel production of its proof version of the Gold American Eagle in 2009 to conserve gold blanks for bullion.”
The stock market is now experiencing volatility in anticipation of the effects of a sudden withdrawal of liquidity brought on by the Fed’s monetary policy of QE coming to an end. As the paper points out, risk in equities could send many flocking to the security of physical gold, driving the price even higher as it did in 2008.
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