Editorial: Precious metal prices collapse as QE3 ends

It’s been another grim day for precious metal enthusiasts as we go to press, with gold prices sinking to US$1,144 an oz., silver at US$15.45 an oz., platinum at US$1,208 an oz. and palladium plumbing US$756 an oz.

These are four-year lows and the charts look terrible — signalling more pain ahead for precious-metal investors in the face of a surging U.S. dollar, a roaring U.S. equities market and slumping commodity prices.

It’s also a time for a collapse in the gold-bug narrative that the massive Quantitative Easing (QE) programs initiated by the U.S. government in response to the Great Recession of 2008 would unleash a wave of inflation that would propel gold to the skies. (A classic example of this line of thinking would be Nick Barisheff’s April 2013 hardcover book entitled “$10,000 Gold: Why gold’s inevitable rise is the investor’s safe haven.”)

The latest leg down, led by gold, started on Oct. 29 with the U.S. Federal Reserve’s Federal Open Market Committee (FOMC) statement that “economic activity is expanding at a moderate pace,” and so it has ended the third round of its asset-purchase program commonly know as QE3 that has added US$1.66 trillion to its balance sheet.

Remarkably, when the QE3 program was announced in September 2012, the jobless rate in the U.S. was 8.1%, and it had been forecast at the time to fall to 6% to 6.8% by late 2015. Instead, it’s now at a respectable 5.9% — a six-year low.

The FOMC said it would also keep interest rates low for a “considerable time,” and that “inflation has continued to run below the Committee’s longer-run objective.”

The committee commented that “although inflation in the near-term will likely be held down by lower energy prices and other factors, it judges that the likelihood of inflation running persistently below 2% has diminished somewhat since early this year.”

The U.S. federal funds rate hasn’t been raised since 2006. In the intervening years, the three rounds of QE added a record US$4.48 billion to the Fed’s balance sheet at its peak.

Overseas, the European Central Bank says it is pondering a QE program to combat the weakest inflation rates in five years, while the Japanese central bank is continuing its own QE program.

Again demolishing the gold bug argument that QE translates to higher gold prices, gold prices were sinking at the same time the European and Japanese central banks were making pro-QE moves and statements.

The stock prices of many precious metal miners and explorers are hitting multi-year lows, particularly in the silver space, as trading volumes dwindle on the TSX Venture Exchange.

And we haven’t even hit tax-loss selling season yet, which may prove to be a final washout and bottom for precious metal stocks sometime between now to mid-December.

Another sign of the demise of the gold bug narrative this year is the severe contraction of the retail market. On our own website, the story comments submitted in years past by upbeat retail shareholders have given way to expletive-laden, bitter tirades about money lost and broken promises by mining company management.

At a larger level in 2014, while mining conventions geared to industry participants have been going strong, the conventions geared to attracting retail investors are being cancelled or downsized. The Hard Assets group was bought up for its stellar Indaba conference in Cape Town, while its retail-oriented, sparsely attended conventions in New York and San Francisco were terminated. Canada’s Cambridge House has had to trim some events in smaller markets and broaden the topics of its remaining conventions to include technology and marijuana companies.