The Impact Of Quantitative Easing On The Economy And The Price Of Gold

It is easy for the average person to see that the apparent value of gold has surged to incredible heights in recent years. What is not so easy to understand is the reason why.

How can something suddenly be worth four or five times as much as it was just a decade ago?

There are many reasons for the sustained value of gold. However, one key event has pushed the value of this precious metal higher than many people thought possible. Quantitative easing has created economic turmoil that will probably continue to push the price of gold even higher than where it is now.

What Is Quantitative Easing?

If you ask people about quantitative easing, you will likely get one of three responses. Most people simply do not know what it is and cannot answer. Others approve of it as a way to sustain the status quo in the economy. A third group has very little to say about this economic policy and if it is any good.

When national economies struggle with issues such as high levels of debt, unemployment, slow growth and other financial ills, there are a variety of methods that they can use to deal with them. Sales of government bonds to raise money are one traditional solution, though it has its own long-term risks.

Quantitative easing is a more recent invention of economists which has received some very negative criticism. Many people refer to this policy as a form of money printing.

No one actually cranks up the presses and rolls of sheets of $100 bills. Economies have come too far into the digital age for that. It is possible for Federal Reserve executives to just punch a few keys at a computer and create the money digitally, if they want to. That is something like what actually happens.

The normal method of dealing with slow growth and other issues in the economy is to lower interest rates for lending. However, the US stands as a good example of how that policy can run out of usefulness. Eventually, interest rates got down to near zero but the economy was still dead in the water.

To further stimulate things, the US Federal Reserve initiates quantitative easing by purchasing many of the commercial banks’ financial assets. This injects money, or liquidity, into the economy.

This sounds like a marvelous idea but the Federal Reserve is not simply returning money into circulation. It basically makes this money up out of thin air. This lowers the value of each note of currency because now there are more units representing the same wealth.

Why Does Quantitative Easing Raise the Value of Gold?

You can lower the value of this fiat currency, so-called because it is made by command and does not represent anything real, but you cannot lower the value of finite objects. Consider a work of art. It is valuable because there is only one of it. Gold is like a work of art. It exists in finite quantities which cannot be reproduced.

When you look at the value of gold, you may notice that this is depicted in terms of US dollars. This is significant for the price. As the dollars grow in number, the gold does not.

This means that gold will naturally acquire value in terms of dollars when money is printed. This is not the sole cause for the drastic rise in the value of gold but it is a major boost in its value.

Quantitative easing has a second and indirect effect on the value of gold. Its market price is also rising because the repeated use of this policy has scared many investors into realizing that the government will expand the money supply at will.

It no longer makes sense to an increasing number of investors to keep their wealth in dollars or in stocks that do not outpace inflation. Even well-known financial wizards and billionaires such as George Soros and Frank Giustra have moved large portions of their portfolios into gold and other solid assets.

George Soros

“The United States dollar is very weak. Investors are moving towards real assets.”

(who has a net worth of $22,000,000,000.00) says:

A Golden Future?

Does this mean that gold is the only real money and paper currency will go the way of the dodo?

Such a scenario is not very likely. Neither is the scenario which involves a return to the gold standard. Even many gold proponents dismiss that possibility because the world has simply moved past such restrictions.

However, gold would certainly play a large role in a basket of commodities that might be used in the future to determine the value of new currencies when this decades-long venture into fiat money has ceased.

Quantitative easing may be the death knell of fiat currency. Gold will certainly function as some sort of foundation for money in the future. Many adherents of the gold rush are happy to let others decide what else will determine the value of new currencies as long as they have gold.