Slaying Fiction about Gold and QE
Assassinating financial fairytales is something I enjoy doing. And the precious metals (NYSEARCA:GLTR) market is jam-packed with fiction of all sizes, flavors, and colors.
One of the biggest pieces of financial propaganda promoted over the past several years is that massive monetary stimulus by the U.S. Federal Reserve Bank (also known as “quantitative easing” or “QE”) has been a bonanza for precious metals (NYSEARCA:SLV). Is it true?
Now that the Federal Reserve’s third round of quantitative easing (QE) is officially over, let’s examine the historical performance of gold (NYSEARCA:GLD) to find out.
Our chart below shows that gold scored its biggest gains from the first round of QE, with a 35.66% pop. But thereafter, gold’s performance for each successive round of QE substantially decelerated.
Interestingly, gold’s gross gain of 45.76% during QE1 and QE2 has nearly been wiped out by gold’s 32.91% loss during QE3.
Furthermore, the relative performance of U.S. stocks (NYSEARCA:VTI) versus gold during these three periods of QE offer us another perspective on gold’s lackluster performance.
During QE1, the SPDR S&P 500 ETF (NYSEARCA:SPY) gained 34.51%, in QE2 it gained 12.07% , and in QE3 it soared 46.16%. Not only did the S&P 500 (SNP:^GSPC) beat gold’s performance during two out of three QE periods, but the S&P 500’s collective gain of 92.74% for all three rounds of QE easily outdistanced gold’s net gain of just 12.85%.
No doubt, fervent goldbugs will attempt to discredit the QE performance facts by arguing the GLD is paper gold, not physical. Regardless, GLD has and continues to be a satisfactory proxy for gold prices.
Not even the performance of long-term U.S. Treasuries (NYSEARCA:TLT) – which the Fed actively bought during QE – comes close to matching stocks. TLT lost 11.22% during QE1, it lost 4.38% during QE2, and recorded a small gain of 3.88% during QE3. Put another way, the U.S. stock market – not gold – has easily been the biggest beneficiary of QE.
So the next time you see or hear a talking head on Bloomberg, CNBC or elsewhere say that QE has been great for gold or precious metals, you can laugh at them because now you know the truth.
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P.S. Check out our recent ETF calls on gold and mining stocks in “Is Gold’s Knockout Punch Coming?”