Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Stock Market Increasing Technical Weakness - 22nd July 19
What Could The Next Gold Rally Look Like? - 22nd July 19
Stock Markets Setting Up For A Volatility Explosion – Are You Ready? - 22nd July 19
Anatomy of an Impulse Move in Gold and Silver Precious Metals - 22nd July 19
What you Really need to Know about the Stock Market - 22nd July 19
Has Next UK Financial Crisis Just Started? Bank Accounts Being Frozen - 21st July 19
Silver to Continue Lagging Gold, Will Struggle to Overcome $17 - 21st July 19
What’s With all the Weird Weather?  - 21st July 19
Halifax Stopping Customers Withdrawing Funds Online - UK Brexit Banking Crisis Starting? - 21st July 19
US House Prices Trend Forecast 2019 to 2021 - 20th July 19
MICROSOFT Cortana, Azure AI Platform Machine Intelligence Stock Investing Video - 20th July 19
Africa Rising – Population Explosion, Geopolitical and Economic Consquences - 20th July 19
Gold Mining Stocks Q2’19 Results Analysis - 20th July 19
This Is Your Last Chance to Dump Netflix Stock - 19th July 19
Gold and US Stock Mid Term Election and Decade Cycles - 19th July 19
Precious Metals Big Picture, as Silver Gets on its Horse - 19th July 19
This Technology Everyone Laughed Off Is Quietly Changing the World - 19th July 19
Green Tech Stocks To Watch - 19th July 19
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Why the Fed's QE Policy is Bullish for Crude Oil Prices

Commodities / Crude Oil Jun 19, 2013 - 03:24 PM GMT

By: Money_Morning

Commodities

Dr. Kent Moors writes: Most investors have followed what the Fed's QE policy has done to gold, but few realize its impact on oil prices.

Recently, I talked about how crude was beginning to occupy a position as a store of market value ("Why Oil Is Becoming the New 'Gold Standard," May 20, 2013). The development has been a direct consequence of the flight from holding gold.


That flight may be tapering and a new floor established for the next major spike by the metal.

The problem is there is no agreement on which direction that move will be...

These days, a sudden improvement in gold prices may only extend as far as hedge funds and institutional investors covering shorts.

Nonetheless, there is an interesting parallel developing between the plight of gold and crude oil prices.

The Consequences of Quantitative Easing

It results from what is becoming a popular mantra - Fed policy has resulted in the creation of phantom assets, a curious rise in bond rates despite the continuing central bank buying of U.S. Treasuries and related paper, and the specter of another asset bubble forming.

Now I have several points of issue with the underlying assumptions of this approach. Yet that is not the focus of this article.

My focus today involves an unattractive (one of several) consequence of Quantitative Easing (which we'll likely have a few more months of after this week's FOMC meeting).

Despite buybacks, U.S. Treasury prices have been declining, resulting in a rise in yields (interest rates). A number of economists have argued that this will require the Fed to initiate policies supporting bond prices.

That move will almost certainly fuel the fires of inflation. Such concerns have been there all along with QE.

According to an increasingly held approach by some economists, holding rates at 0% for eight consecutive quarters would result in significant inflation anyway. Nobody knows for sure because the current experiment has never been attempted before.

Nevertheless, widening uncertainty about navigating such uncharted waters has discounted the view that QE could ever be a long-term strategy. It may also explain the conflicting statements coming from Fed members over when the bank gets out of the surrogate money business.

Oil Prices and Quantitative Easing

And this brings us back to the potential impact on oil (and gold)...

I have made the observation that Fed policies cannot sustain a prolonged non-market-induced growth cycle. One blunt truth results from rising interest rates in the face of QE (especially at the longer end of the curve) - the bond market is expecting higher inflation levels moving forward.

In an interesting column on June 13, Minyanville's J.W. Jones provided a nice connection.

Entitled While the Fed Parties, Gold and Oil Have Left the Building, the piece is based on more detailed analysis done earlier by staff at none other than the Federal Reserve Bank of New York.
Called The Forward Guidance Puzzle, this is a thought-provoking piece.

Jones observes that, "If the printing presses fire up fast and furiously to help put a floor under Treasury bonds (cap rates), what is going to happen to commodity prices such as oil?"

As the article illustrates, a coiled price pattern develops that ultimately will lead to a strong move in price.

The NYMEX futures crude contract closed last Thursday above $96 a barrel. According to the "coiled pricing pattern," that is already in the $96-$98 range that would drive prices up above $110.

Of course, market dynamics could then put on the brakes for a range of reasons. That translates into the "coil" directly or indirectly producing a rapid movement in price.

Here's the interesting observation: the Fed's QE policy actually will intensify that price change, regardless of its direction.

According to Jones' analysis, "gold futures are also in a basing pattern after selling off sharply... Similar to oil futures, gold futures prices are coiling up as well and could go [in] either direction."

Once again, the Fed cannot prevent it.

However, combining the concern over consecutive quarters of 0% in the bond market (an assumption of higher inflationary pressures) and the qualities exhibited by both oil and gold prices nicely illustrated by Jones' charts, would likely result in liquidity rapidly moving into commodities as soon the Fed tries to support bond prices (and restrain bond yields).

A fair amount of that liquidity results from the "quick fix" paper printed for QE. It is not based on the generation of assets or wealth; rather, it results from central intervention.

But there is nonetheless one takeaway. The corner the Fed has painted itself into with QE will require addressing the bond panic.

And that is going to result in higher prices in the energy sector.

For more on oil prices in 2013 from our energy expert Dr. Kent Moors, check out his latest analysis: Are the "Special Few" Manipulating Oil Prices?

Source :http://moneymorning.com/2013/06/19/why-the-feds-qe-policy-is-bullish-for-oil-prices/

Money Morning/The Money Map Report

©2013 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules