Quantitative Easing Engineered by the FED, and Prices of Internationally Traded and Dollar Denominated Commodities and Precious Metals

Abstract

I study the impact of quantitative easing by the FED on the prices of internationally traded and dollar denominated commodities (oil) and precious metals (gold, silver, platinum and palladium). Finite distributed lag models suggest that the long run multipliers in regressions of the log of precious metals or commodities prices on the log of the US monetary base is about one, i.e., a permanent one percent increase in the US monetary base results in one percent increase in the prices of these commodities and precious metals. In other words, the quantitative easing actions by the FED are purely inflationary as predicted by classical economic theory. I also present an event study of the quantitative easing announcement effects on prices, and these are small for precious metals and negative for oil. Overall this study suggests certain dissonance between the price behavior on one hand in the bond market, and on the other in the commodities and precious metals markets. It also suggests that taking the US CPI reported by the Bureau of Labor Statistics to be identical with the concept of inflation can be quite misleading. Further research is needed to determine why the implied inflation in the US CPI and the US government debt market is so different from the implied inflation in the US dollar denominated and internationally traded commodities and precious metals.