On Monday we gave an overview of quantitative easing (QE), explaining what it is, who controls it, and how the American public receives information about it. QE is a program implemented by the Federal Reserve that injects new money into the American economy in hopes of helping it grow. But how does it relate to gold?
Quantitative Easing and the Stock Market
The Federal Reserve’s QE program involves buying bonds and mortgage-backed securities, which are lower-risk, longer-term investments that have lower returns. The Fed buys large dollar amounts of them – $85 billion per month, in fact. Since so much money is now tied up in bonds, investors are more likely to put their money in stocks instead. Stocks are considered a more “risky investment”, but have higher potential returns. What this has created is an increase in demand for stocks, which drives up their price. The process feeds on itself, since chatter about high stock prices and yields creates more demand, which then raises prices even higher. The stock price becomes artificially inflated, since it’s heavily based on market hype and not actual company profits. QE also fuels this by pumping more money – $3.6 trillion since 2008, to be exact – into the market.
But this expansion can only be sustained for so long, leading to a market bubble ready to burst any second. Eventually prices reach a point where they’re too high and no one can afford to invest in stocks anymore, and then they plummet. The bubble pops, prices fall, and businesses and shareholders suffer. Many analysts believe we are currently in this situation, with some even saying “we are in the third largest stock market bubble in U.S. history“.
When does gold come into the equation?
Since stocks have been performing so well, the demand for gold has fallen. Placing too much of your money into stocks might be risky though, since an event such as a bubble burst can lead to a market-wide crash, leaving your stocks vulnerable to losses. Even when the stock market is doing well, a company can go out of business, complete a merger, move overseas, have a change in management, etc. at any time. Gold is not vulnerable to such events, since it is a physical asset not subject to artificially inflated prices and manipulation through money printing. It would be extraordinarily unlikely for gold to suddenly lose all value overnight, but this has happened to stocks five times since the mid-1800s: in 1853, 1906, 1929, 1969, and 1999.
When stocks become less attractive investments and fall in price, commodities such as gold tend to rise in price instead, meaning now may be a wise time to buy gold while its price is low. At any time, portfolio diversification is important, since different investments hold different types of risk and respond variously to market trends. You want to avoid your portfolio suddenly losing too much value at once, and keeping an asset in it such as precious metals that hold their value over long periods of time provides a safeguard from such an occurrence. For your retirement portfolio, consider adding gold and other precious metals to it with a Gold IRA. Secure your financial future from irresponsible monetary policy leading to market crashes and invest in something real. Call American Bullion at 1-800-326-9598 to get started today.