QE, quantitative easing, and interest rate cuts are almost all aimed at increasing cash flow, encouraging investment and consumption, and promoting economic development, but there are still certain differences between the two.
QE mainly refers to the intervention method in which the central bank purchases medium- and long-term bonds such as treasury bonds to increase the supply of base money and inject a large amount of liquidity funds into the market after implementing a zero-interest rate or near-zero-interest rate policy to encourage spending and borrowing. It is simply described as indirect printing of banknotes.
Cutting interest rates means that banks use interest rate adjustments to change cash flow. When the bank lowers the interest rate, the income from depositing funds in the bank decreases, so the interest rate cut will lead to the outflow of funds from the bank, and deposits will be converted into investment or consumption, resulting in increased liquidity of funds.
Under normal economic development, the central bank fine-tunes the interest rate through open market operations, generally by purchasing short-term bonds in the market, so as to adjust the interest rate to the established target interest rate.
Quantitative easing is not the case. Its goal is to lock in long-term low interest rates. The central banks of various countries continue to inject liquidity into the banking system—putting a lot of money into the market. Rather, it has a significant impact.
The Federal Reserve’s four QE plans, through large purchases of U.S. Treasury bonds, lower long-term interest rates, avoid inflation, and reduce unemployment, as shown in the figure below.
That is, on November 25, 2008, the Federal Reserve announced for the first time that it would purchase agency bonds and MBS, marking the beginning of the first round of quantitative easing policy; The currency buys long-term bonds issued by the Treasury.
According to QE2, the economic data of the United States did not recover as expected. In response to the crisis, the third quantitative easing policy was implemented after 2010; in December 2012, the Federal Reserve announced the launch of the fourth round of quantitative easing, purchasing 45 billion treasury bonds every month. Keep rates low at 0-0.25%.
In 2013, the Federal Reserve announced that it would scale back its bond purchases, indicating that the U.S. stimulus policy was coming to an end. It was a turning point for the largest monetary policy action in history. However, the previous rounds of QE programs did improve the U.S. economy and job market.
According to the QE plan implemented by the Federal Reserve, its stages can be divided into five stages, the first stage: zero interest rate policy; the second stage: supplementary liquidity; the third stage: actively release liquidity; the fourth stage: Guide the market to lower long-term interest rates; the fifth stage: after the financial crisis, there is no end to quantitative easing.
What impact will the implementation of the Fed's four rounds of QE plan have on the gold market and gold price, as shown in the figure below?
When the QE program was first launched, the price of gold rose because the United States printed money with unlimited easing, which directly reflected the depreciation of banknotes, and the price of gold rose accordingly.
However, during the implementation of the QE plan, the U.S. finances successfully avoided the fiscal cliff. The U.S. economy and unemployment rate have greatly improved. Various economic indicators show that the U.S. economy is recovering. The recovery of the U.S. economy has reduced the U.S. unemployment rate. At this point, the United States will scale back and end the QE program, which means that the dollar will no longer depreciate.
The U.S. economy will drive the stock market again, and the dollar will rise again. As the dollar rises, gold will lose its role as a safe haven, and its price will start to fall.
That is, the price of gold will rise first and then fall back.
The so-called buying expectations in " buy expectations, sell facts" is to buy based on the news, why the quantitative easing policy is to buy expectations, as shown in the figure below.
Because quantitative easing is good for gold and bad for the dollar, when quantitative easing is implemented, investors will start buying gold.
The news here refers to anticipatory panic and rumors. Investors will buy gold based on market rumors and expected bullishness, so the price of gold will rise after the implementation of the quantitative easing policy.
When the quantitative easing policy is implemented for a period of time, the price of gold continues to rise for a period of time, and when the quantitative easing policy is about to end, the market will not pursue more at a high level, because the news that everyone knows is already worthless.
Quantitative easing is a policy implemented to stimulate and revive the U.S. economy. After the implementation of quantitative easing, people are actually more concerned about whether the economic growth rate of the United States can keep up with the pace of the implementation of the quantitative easing policy. Whether the quantitative easing policy will It will be difficult to achieve the expected purpose and whether it can truly reflect the level of economic recovery. Out of these concerns, investors will buy gold again to avoid the risks brought about by the instability and uncertainty after the implementation of the quantitative easing policy.
In short, the expectation of quantitative easing is bullish for gold, leading to a rise in the price of gold. As mentioned above, that is, this is an economic move in the financial market, whether it is a series of uncertainties such as interest rate hikes, US presidential elections, and wars. When there is news, there will always be something like this: selling expectations, buying facts, or selling facts, buying expectations.
Risk reminder: remember to take profit and stop loss when trading, and put risk management first.
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