Investors have become conditioned to the effects of the U.S. Federal Reserve’s quantitative easing actions in 2009 up to the present, more or less, which have been observed to produce grinding liquidity-induced increases in asset prices of all stripes, including stocks and commodities.
This has led to the somewhat complacent assumption that QE will continue to have the same effects, time and time again, each time it is deployed. The ultimate arbiter, however, of the effects of QE in terms of adding liquidity to and supporting the financial system at the margin will always be the markets.
This is why we find the action of gold quite puzzling within the conditioned paradigm of more QE = more asset price inflation. Gold has responded to the onset of Euro-QE backed by a Fed that has made dollars available to foreign banks at lower rates by moving decisively below its 200-day moving average. This begs the question: As we move into the New Year, what might the action of gold be telling us about the state of QE in January 2012?
