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The Bank of Canada Ends QE, Plunging Gold Prices in CAD

The Bank of Canada Ends QE, Plunging Gold Prices in CAD | FXMAG.COM
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  1. Implications for Gold

    So, QE ended (so far in Canada, but the Fed will follow suit) and the termination plunged gold prices in Canadian dollars. Will this repeat globally?

    Finally! Yesterday (October 27, 2021), one central bank ended its quantitative easing program after gradually reducing the pace of asset purchases earlier this year. Don’t panic though - it wasn’t the Fed, nor the ECB, nor the Bank of Japan. It was the Bank of Canada. As we can read in the monetary policy statement:

    In light of the progress made in the economic recovery, the Governing Council has decided to end quantitative easing and keep its overall holdings of Government of Canada bonds roughly constant.

    Of course, the central bank didn’t say a word about a reduction of the size of its balance sheet. This is how the dovish bias works: central banks never return to the pre-crisis levels of interest rates or balance sheet. Anyway, I would like to focus on the fact that the central bank of Canada admitted that it underestimated the persistence of inflation, which could remain elevated next year:

    The recent increase in CPI inflation was anticipated in July, but the main forces pushing up prices – higher energy prices and pandemic-related supply bottlenecks – now appear to be stronger and more persistent than expected.

    More persistent and higher inflation implies sooner monetary policy tightening. The BoC signaled that it could hike its main policy interest rate in mid-2022:

    We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2% inflation target is sustainably achieved. In the Bank’s projection, this happens sometime in the middle quarters of 2022.

    The direct consequences of the Bank of Canada ending QE should be limited, as the BoC’s actions are not too meaningful for the global financial markets. However, yesterday’s decision is emblematic of the current shift among central banks from monetary easing into monetary tightening. Investors should be thus prepared for more persistent inflation and for a hawkish response of central banks.

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    Interestingly, while the BoC has just completed its asset purchases program, the Fed is only going to start tapering its own quantitative easing program. It means that the US central bank is tardy and behind the curve (especially that inflation in Canada is lower than across the border). So, its reaction will have to be stronger in the future. The market expects the first hike in the federal funds rate to happen in June 2022, so also in the middle quarters of 2022, despite the Fed’s one-year lag behind the Bank of Canada.

    Gold may struggle until the Fed’s tightening cycle starts. You have been warned!

    Implications for Gold

    What does the end of Canadian quantitative easing imply for the gold market? Well, the direct impact on gold prices denominated in greenbacks should be minimal. However, the decision to stop QE exerted a huge impact on the price of gold denominated in the Canadian dollar. As the chart below shows, the price plunged yesterday from about 2228 CAD to C$2204 CAD within minutes.

    the bank of canada ends qe plunging gold prices in cad grafika numer 1the bank of canada ends qe plunging gold prices in cad grafika numer 1

    This drop may be a harbinger of what may happen in the international gold market when the Fed tightens its own monetary policy. Of course, the announcement of tapering at the November FOMC meeting is widely expected. However, please remember that the message of tapering could be accompanied by other hawkish signals as well. So, although gold has been moving upward recently (see the chart below), its struggles could continue for a while.

    the bank of canada ends qe plunging gold prices in cad grafika numer 2the bank of canada ends qe plunging gold prices in cad grafika numer 2

    The silver lining is that the drop in the gold price in CAD – although abrupt – wasn’t too deep overall and reversed quickly. To be clear, a 1% drop is relatively large, but it’s not a total disaster, especially given the prominence of the event. It seems that inflation worries currently provide support for gold prices.

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    Arkadiusz Sieron, PhD
    Sunshine Profits: Effective Investment through Diligence & Care


    Arkadiusz Sieron

    Arkadiusz Sieron

    Hi, my name is Arkadiusz Sieroń. Call me a liar, but I am writing about the precious metals thanks to Arthur Laffer, Alan Greenspan, John Keynes and Fredrich Hayek. Really! Would you like to know how these economists, some of whom have been dead for a long time, triggered my adventure with gold? When I was in high school, I took part in the Entrepreneurship Olympic, one of the biggest thematic competitions for pupils from secondary schools. During my preparations, I studied an academic textbook, in which I came across a Laffer curve. Eureka! If the tax revenues are the same at low and high tax rates, the government should lower them! I did not win the competition, but I achieved much more. I decided to become an economist! And I loved the idea of small government and economic freedom since that very moment. After graduating from high school, I moved to the capital. I was very excited, as I started to study economics at the best economics university in the country. However, the professors disappointed me very quickly. Why? They all were statists, supporting extensive government intervention and fiat currencies. Gold? It is a barbarous relic! Have you not read Lord Keynes? I was very depressed. I even considered giving up my studies in economics and enrolling in the Philosophy Faculty! You can see now that I was really desperate. When I was contemplating nothingness and vanity of vanities, a few of my classmates lent me a handful of fascinating books, such as Capitalism and Freedom by Milton Friedman. I also discovered the publications of the Austrian economists who supported the idea of the gold standard. It sounded crazy in the 21th century, but it was inspiring. I rediscovered the sense of studying economics. I continued my studies and one day I read these words: “Gold and economic freedom are inseparable”. Try guess who wrote them. Don’t give up, try once again. Don’t know? Alan Greenspan. Shocking, right? This is a quote from his “Gold and Economic Freedom”, an article published in 1966. Several years before he became the Fed Chair, and several more before the real estate bubble, that he helped to pump, up burst. Quite ironic, don’t you think? Both his essay and the Great Recession (and the accompanying bull market) motivated me to study investment portfolio management and the precious metals. I became a certified Investment Adviser very soon and I started to work for the biggest pension fund in the country. My corporate career seemed to be very promising. However, I quickly discovered that the company invested most of the participants’ funds into Treasuries or shares of the big state companies. And they didn’t even want to hear about investing in precious metals. I quit. I found a shelter at the university, as a Ph.D. candidate and – after a defense of my thesis about certain negative consequences of inflation (i.e. the Cantillon effect) – as an Assistant Professor. I was finally free to study economics, freedom, and gold. The more I read about gold, the more I was terrified. Most of the so-called experts who write about the precious metals, don’t have any idea about the subject they discuss. They treat gold as a mere commodity. Or they claim that gold is either worthless as it does not bring any yield or that its price should always rise. I was really let down by the state of understanding of the gold market among the analysts and investors. But I could not do too much. Until the sun shined down on me. I got a job offer at Sunshine Profits. I didn’t hesitate a second and accepted it, although many professors discouraged me: “You are a scholar, focus on science and do not write silly newsletters about bullion" -they advised me. But I did not listen to them, as they clearly didn’t understand the nature of gold. It is not a barbarous relic, it is the longest used money in history, and a clinking witness of human civilization. Gold is the asset, which used to serve as the safe- haven and portfolio diversifier for investors from the entire world for years. I wanted to study its properties and to share with my knowledge with people who do not have time for that. I wanted to help investors to better understand fundamentals of the gold market and improve their investment decisions. I’m happy that I can do that at Sunshine Profits. I’m really proud to be a member of our team and provide investors with high quality investment analyses about the gold market.


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