The Empirical Research On The Effects Of U.S. Quantitative Easing Monetary Policy To The Gold Price

Global financial crisis broke out in 2008. In order to effectively respond to the financial crisis, to make the country recover from the recession, the United States launched quantitative easing monetary policy. From Nov.2008 to Oct.2014, the Fed has conducted four rounds of quantitative easing monetary policy. During the first two rounds of quantitative easing, gold price hit a historical high. But during the Operation Twist and the latest two rounds of quantitative easing, gold price appeared inflection point and continued to fall. Therefore, the purpose of this study is to answer two questions:1, In the period of quantitative easing, what are the main factors to affect gold price? 2, Why the gold price took a major turning point?Through the study, the characteristics of quantitative easing monetary policy of the United States are:first, the short-term interest rate goes near zero. As an intermediate target, the effect of short-term interest rate fails. Deflation is expected. Second, the contents are the purchase of long-term bonds, federal agency debt securities and mortgage-backed securities. Third, the expansion and restructuring of the Fed’s own balance sheet. Fourth, the innovative monetary policy tools and the expectation management. Fifth, the intermediate targets include the decline of long-term interest rate, the triple of monetary base, and the increase of money supply. Sixth, the ultimate objectives include the unemployment rate of 6.5% and the inflation rate of close to 2.5%. So according to the characteristics of quantitative easing of the United States,we choose monetary base, broad money supply and the U.S. dollar index as variables to establish the VAR model of international gold price by using monthly data from Nov.2008 to Oct.2014. It is concluded that monetary base of the United States has a positive impact on the international gold price and contributes most. The impact of the United States broad money supply on the international gold price is from positive to negative. The U.S. dollar index has a negative impact on the international gold price. In addition, through the Granger causality test, during the period of quantitative easing, the U.S. unemployment rate and the U.S. inflation rate can explain the future trend of gold price. There are three reasons for the dramatic increase of gold price during the first two rounds of quantitative easing:first, the fed continuously purchases large amounts of bonds and securities, which leads to an increase of the monetary base and the creation of a large number of credit money. Through Tobin Q, wealth effect and the effect of psychological expectation, the increase of money supply is transmitted to assets prices, including gold, prompting gold price rise. Second, the excessive rise in the money supply, which makes inflation go high, promotes the rise of gold price. Third, the excessive US dollar causes the depreciation of itself, which leads to the rise of gold price.There are three reasons for the dramatic decline of gold price during the late period of quantitative easing:first, the Operation Twist was introduced unexpectedly, breaking the expectation of inflation, and keeping gold price under pressure. Second, the asset diversion effect of money supply caused the U.S. stocks to go strong continuously. People give up gold and chase stocks. Third, the U.S. economy appeared signs of recovery, which causes the appreciation of US dollar and the expectation of end of quantitative easing. Therefore, gold price continues to decline.