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Last week the Reserve Bank of New Zealand (RBNZ) announced they would be ending their Large Scale Asset Purchase (LSAP) program – i.e. Q.E. – by 23 July.
The announcement came just as we were sending out our weekly newsletter. So we only had time to jot down a few thoughts:
Late Update: RBNZ to Stop QE This Month
…the Reserve Bank has announced that they will end their Large-Scale Asset Purchase (LSAP) programme by July 23. This is central banker speak for currency printing. Where the central bank buys NZ government bonds with currency it creates from nothing.
Originally the LSAP was due to continue into 2022. However it seems the RBNZ is finally realising how much of an impact this has had in distorting the New Zealand economy.
The Official Cash Rate (OCR) remains at the record low of 0.25%. The Funding for Lending Programme (FLP) is also unchanged. The FLP gives banks access to lending at the (OCR) for a term of three years. Where normally this is of a short term duration only.
So in a nutshell credit remains very easy and is likely to further stoke distortions in the New Zealand economy yet. Don’t expect a collapse in house prices any time soon.
The Kiwi dollar has jumped in response, but is still up only around 60 basis points. So not a huge jump considering. But that puts the dollar back about where it was a week ago. As a result NZD gold is down about $18 from what we had written earlier. While silver is down a further 27 cents.
Source.
In response a reader emailed us back asking:
“What is going on with RBNZ and their decision to stop QE? and what does it mean for PM prices going forward?”
So here’s our take on why they ended QE early and what impact it might have on the price of precious metals in the future…
Why Has the Reserve Bank Ended Q.E. Early?
The official line from the reserve bank is:
“The Monetary Policy Committee agreed to reduce the current stimulatory level of monetary settings in order to meet its consumer price and employment objectives over the medium-term.”
They further stated:
“…The Committee discussed the stance of monetary policy in light of the improving economic activity. Members agreed that the major downside risks of deflation and high unemployment have receded. The Committee agreed that a ‘least regrets’ policy now implied that the significant level of monetary support in place since mid-2020 could be reduced sooner, so as to minimise the risk of not meeting its mandate.”
So translating the central banker speak:
If they keep QE going they run the risk of stoking inflation beyond their 1-3% remit. House prices have gone nuts and currency printing has likely played a large role in this. Although you won’t see that admitted anywhere. But QE rewards those who get access to the money sooner. Initially this is the banks and then those able to borrow from the banks. So QE has been ended early to try and avoid even greater distortions in the New Zealand economy.
How Has QE Affected Precious Metals Prices in New Zealand to Date?
The RBNZ announced its QE plans on 23 March 2020, with gold in NZ dollars priced around $2600. This caused an initial spike in gold, mostly due to the weakening of the NZ dollar. Gold in NZ dollars then reached an all time high on 7th August 2020 of $3100.
So you could make an argument that QE boosted the NZ gold price by almost 20%. However QE did not happen in isolation. The official cash rate was also lowered to just 0.25%, a record low. There was also significant government stimulus put in place (see here for a full outline of everything done in New Zealand and also the USA).
In fact as the chart below shows gold in NZD had been rising since 2014. Up 73% from around $1500 to when QE was first announced. So this clearly shows currency printing is not required for NZD gold prices to rise.
Also despite reaching a high in August, the NZD gold price is today at pretty much the same price as when QE was announced. So for the later part of 2020 and the first half of 2021, QE has not had much impact on the gold price.
Chart: Impact of QE on NZD Gold
Chart: Impact of QE on NZD Silver
How about silver?
At first glance at the chart below, QE appears to have had a big impact on the price of silver in NZ dollars. From $23.31 the day of the LSAP announcement, silver spiked to $45 under 3 months later. However, silver had plummeted as the COVID19 mania hit full swing. The RBNZ QE announcement was one of many announcements, including the slashing of interest rates to all time lows. So the move up in price may have had a lot to do with markets going from; “the end of the world is nigh”, to; “okay maybe we will survive”. In short it may have been about the return of confidence as much as anything.
Also silver has traded in a wide sideways range for the past year. The whole time the RBNZ has been engaged in currency printing, but the silver price hasn’t continued to rise.
Does the End of QE Mean the End of The Precious Metals Bull Market?
Given that gold and silver prices rose (to varying degrees) following the implementation of QE, does it mean prices will fall, now that QE has ended?
As we have alluded to already, we don’t believe QE has been the main factor causing gold and silver prices to rise.
If not QE, then what is the main driver of precious metals?
Why Real Interest Rates Are the Most Important Driver of the Gold Price
We’d say the likely biggest factor driving gold and silver prices are real interest rates. This is simply the current interest rate, less the current rate of inflation.
Read more on Real Rates and Gold:
So when the real interest rate is very low or negative (as it is now), then people are more likely to move into gold. Why?
Because gold might not pay any interest, but if you also aren’t getting any interest from the bank or from bonds, then you lose nothing by being in gold.
Real interest rates in New Zealand have been falling for most of the past 6 years. Not surprisingly gold has spent most of this time rising.
What Will Real Interest Rates Do Now?
You’ll no doubt have heard the discussions in the media that interest rate rises are inevitable and coming as soon as next month. They reason that with housing going crazy and inflation rising, the RBNZ will have to raise interest rates to quell housing and inflation.
So then the thought might be that rising interest rates will be negative for gold too.
However as explained above it is the real (i.e. after inflation) interest rate that is key for gold.
Inflation is currently the highest it has been in a decade. Despite mainstream reports of it just being transitory, the risks are growing that inflation could be persistent.
Our bet is that inflation will remain elevated compared to the levels of recent years.
Our theory then goes, that the Reserve Bank will be slow to react to any increase in consumer inflation rates. They will continue to expect the current higher inflation just to be a temporary blip. They be reluctant to increase rates too quickly as the economy remains in a somewhat precarious position. With very high consumer debt levels putting many home owners at high risk should interest rates rise too much. So any increases in interest rates will likely lag increases in inflation. Therefore, real rates are likely to remain low to negative for some years to come yet.
So the end of QE and even the raising of the Official Cash Rate, will not be enough to get real rates back firmly into positive territory for any length of time.
Accordingly gold is likely to have a tailwind behind it for some years to come too.
In summary, the end of QE may turn out to be a non event in the long run for gold and silver.