“The Fed Controls Gold Prices”? Just Because They Keep Saying It Doesn’t Make It True

By Elliott Wave International

According to mainstream economic wisdom, there are three certainties in life: Death, taxes and the Federal Reserve being Geppetto to gold’s price strings. One way the Fed allegedly controls gold is:

An increase in rates and decrease in stimulus leads to falling gold prices.

But that’s not the Fed we’ve come to know since the coronavirus pandemic began in March 2020. That Fed has embraced a dovish policy of low rates and increased stimulus — which supposedly caused gold to shine

  • “Gold Climbs on U.S. Stimulus Outlook, Fed Bets” (Dec. 14 Bloomberg)
  • “Gold Rises on U.S. Stimulus Plans, Dovish Fed Stance” (Jan. 14 Reuters)
  • “Gold Gains on Dovish Comments from Fed’s Powell” (Jan. 13 CNBC)

One Jan. 5 FX Empire even assumed that gold’s future is squarely in the hands of the U.S. central bank, asking quote “Will the Fed Support Gold Prices in 2021?”

“Gold ended 2020 at $1,891, partially thanks to monetary policy easing. In 2021, the Fed may not trigger a comparable rally in gold, but it should offer gold prices some support.”

Many investors accept this idea as fact because they hear it repeated again and again. But we can show this notion is simply not true.

Take a look at this chart of gold prices since 2011: (source: Goldprice.com)

You can see that from 2011 to December 2015, gold prices plunged 40-plus percent to 6-year lows. By mainstream logic, gold’s freefall would have coincided with a hawkish Fed.

In fact, it was the opposite: from 2011 thru November 2015, the Fed left interest rates at their lowest-ever level near .25-.0%, until it raised rates in December 2015.

In addition, 2011 thru 2014 was during the years of “quantitative easing,” when an estimated $4.5 trillion in stimulus was injected into the markets and economy. Said one October 30, 2013 CNN Business:

“Call it QE-Indefinitely. The central bank has been buying $85 billion in bonds every month since September 2012, and has said it will continue to do so until the job market improves “substantially.”

“If these predictions come true, this round of QE is likely to total more than either of its two predecessors… There’s still no end in sight for the Federal Reserve’s stimulus program.”

Conversely, consider the period from December 2016 thru August 2019: gold was mostly higher, as prices pushed to a 6-year high. That’s the sort of price action which suggests a dovish Fed — right?

Nope! During this time, the Fed RAISED rates 8 times — and QE had long been retired: (circa: Oct. 2014)

Next, November 2019 to July 2020. Gold’s rally resumed, yet the Fed cut rates 5 times and pulled its stimulus program out of retirement with the quote “quiet” launch of QE4 in January 2020.

But then, just when things seemed to fit neatly into the dovish Fed-rising gold box, we come to August 6 2020: prices peaked and the trend turned down, DESPITE the zero interest rate policy and trillions in new Fed stimulus.

The evidence speaks for itself: there’s no consistent correlation between the Fed’s policies and gold prices.

If we look at the last year in gold prices, however, we do see a consistent relationship between Elliott waves and the yellow metal’s trend. Here, we start in mid-March 2020. Then, gold had just endured one of its worst weekly declines in decades and financial news fell back on old habits.

Writes one March 17 Kitco, “Gold prices will bounce back AFTER central banks flood markets.” Mind you: this was many monthsafter central banks had already made FIVE rate cuts and flooded the markets with trillions in stimulus via QE4.

Yet, on March 20th of 2020, our Metals Pro Service showed a version of this hourly chart of gold, which called for a wave c rally to “1572.50-1602.66 area in wave c of (ii) before a top forms.”

Then, the March 24 Metals Pro Service showed a version of this long-term chart of gold, calling it a “traders’ market” with prices in the coming year set to revisit the 2011 price peak at $2028.

From there, prices moved mostly sideways until early June. On June 4 Metals Pro service showed a version of this chart and called for prices to briefly fall, after which gold should “push up to the 1850-1900 area in the coming weeks.”

From there gold briefly fell and then started to rally. Then, our July 14 Metals Pro Service extended its arrow into the $2000-$2200 range and said the “outlook is immediately bullish while support holds.”

In turn, gold soared as high as $2089 on August 6, before pulling back.

Then, on August 11, our Metals Pro Service showed this bearish count and said, “Gold may have completed the bear market rally from 2015 at 2089.20 and [is] starting to fall.”

Gold’s descent indeed continued, as prices fell for months into the November 29 low.

On November 30, Metals Pro Service turned near-term bullish and said, “The pattern is nicely developed to support a bottom forming, but it may take a few days for recent enthusiasm for selling to attract buyers.”

And gold soon rallied more than $200, to a high on January 5. On January 6, Metals Pro Service showed a bold down arrow and said “it seems clear… a correction down is underway now.”

From there, gold fell to a five-week low.

At the end of the day, precious metal traders don’t need expertise in Federal Reserve policies. They do want to know the beginning of major trend changes in the market they follow.

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This article was syndicated by Elliott Wave International and was originally published under the headline “The Fed Controls Gold Prices”? Just Because They Keep Saying It Doesn’t Make It True. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.