QE Link to Gold, Silver and Tech Stocks?

Central banks injected unprecedented levels of liquidity into the banking system and bond market amid pandemic-related shutdowns of large segments of the global economy. As a result, the balance sheets of the Bank of Japan, Bank of England, Bank of Canada, European Central Bank and the US Federal Reserve (Fed) are at their largest levels when measured relative to their respective GDP (Figure 1).

Figure 1: Central bank balance sheets expanded to record size, but the pace of growth slowed in Q3.

Most of the expansion took place between March and June, and the asset purchases have slowed significantly since, especially in the United States. The Fed expanded its balance sheet by $3 trillion between mid-March and mid-June, but has since stated that it will slow further asset purchases to around $25 billion per month – which may sound like a lot but it’s a 97.5% decrease from the March-to-May pace of growth (Figure 2).

Figure 2: The pace of expansion slowed over the summer especially in the US (in light blue).

It’s too early to say if the balance sheet expansion will have any impact on consumer prices, but if the past decade’s experience with quantitative easing (QE) is any indication, the impact on consumer prices may turn out to be minimal. Asset prices are another story. The prices of certain types of assets responded strongly to the increase in the amount of central-bank credit, notably the price of gold, silver and technology stocks, like those that dominate the Nasdaq 100 index.

  • The Nasdaq 100 rallied 88% from its March lows to its high in early September.
  • Silver rose 157% between mid-March and early August.
  • Gold rallied 42% off its March lows, also peaking in early August.

Since then, all three markets have moved lower. By late September gold had fallen 10.5% from its highs, the Nasdaq 100 has fallen by 14%, and silver is down by 26% (Figure 3). It is possible that these declines are merely corrections after such powerful rallies.

Figure 3: Did the balance sheet expansion cause the rally in gold, silver and Nasdaq 100?

There is, however, another possibility: all three markets may have been propelled by the Fed’s balance sheet expansion and have since lost steam as the Fed, and to a lesser extent its peers, slowed the pace of QE.  Two factors point in the direction of this possibility:

  1. Timing
  2. The relationship between equity prices and expected future dividend payments


The rally in gold, silver and equities began at almost the same moment that the Fed began expanding its balance sheet. As the Fed slowed QE by 97.5% in June, these markets continued to rally for two to three months before eventually correcting.

Correlation in timing is not the same as causality. That said, if one creates $3 trillion in new money, those funds must go somewhere. In a direct sense, the Fed put it into the bond market, buying U.S. Treasuries, mortgages and corporate and municipal bonds across the maturity spectrum. Since June, however, the Fed has limited its buying to U.S. Treasuries and mortgage bonds.

The impact of the Fed buying bonds is noticeable in its impact on the shape of the yield curve. When the Fed slashed rates in 2001 and 2002 in response to the “tech wreck” recession, the yield curve steepened to the point where there was as much as a 350 basis-point difference between 3M T-Bill rates and 30Y Treasury yields. 3M30Y spreads were similar in 2009 but narrowed over the course of the next five years as the Fed expanded its balance sheet. This time around, the difference between T-Bill rates and 30Y US Treasury yields is only about 140 basis points. In other words, by expanding its balance sheet to such a great extent, the Fed appears to have flattened the yield curve (Figure 4)

Figure 4: Has Fed QE flattened the yield curve?

Lower longer-term rates mean that investors no longer get a big pick up in the yield curve for taking on additional duration risk. And indeed, a lot of long-duration assets that would normally trade in the market are residing on central bank balance sheets. As such, investors have looked elsewhere, such as equities, for returns. Finally, the simultaneous growth in central bank balance sheets and the widening of budget deficits have driven investors into precious metals, likely fearing for the future value of fiat currencies (Figure 5).

Figure 5: The US budget deficit expanded to 14% of GDP by August 2020, its highest since WW2

Expected Discounted Dividends Have Diverged from Equity Prices

In 2015, CME Group launched S&P 500® Annual Dividend Futures. Initially there were just six contracts: the current year plus five subsequent years. In 2017, that expanded to 11 contracts; the current year plus 10 subsequent years. If the nominal value of the next 10 years’ worth of expected dividends is summed up and graphed alongside the S&P 500®, it becomes clear that since early 2017, the next 10 years’ worth of dividends have stagnated while equity prices have risen substantially (Figure 6).

Figure 6: In nominal terms, expected future dividends haven’t moved much even as stocks rose

According to financial theory, the equity market is right not to respond to the nominal value of future dividends. Rather, it should respond to the net present value (NPV) of future dividends, whereby future dividends have been discounted back into the present by interest rates of corresponding maturity. Between January 2017 and March 2020, the S&P 500 and NPV of future expected dividends moved largely in lockstep. The NPV of dividends rose because long-term interest rates were falling even before the pandemic struck. Lower long-term rates increase NPV of future cash flows.

What is curious, however, is that since March, this relationship has broken down as well. The NPV of dividends has hardly moved while equity prices soared until early September (Figure 7). The gap between equity prices and the NPV of dividends could re-converge in one of three ways:

  • Equity prices could fall.
  • The stock market, currently pessimistic about dividend growth, could become optimistic (Figure 8).
  • Long-term interest rates could fall further, raising the NPV of future dividends.

Figure 7: The NPV of dividends and the S&P 500 moved in lockstep until March

Figure 8: Investors are cautious about expected dividends over the next decade

Equity prices peeling away from the NPV of future dividend payments may also be a consequence of the latest round of global quantitative easing. Afterall, the NPV of future dividends and equity prices had moved in lockstep until March when, for the first time in our relatively brief history, they separated.

We use the dividend futures for the S&P 500 because they don’t exist for any other indices. For its part, the S&P 500, like the Russell 2000, has tracked consumer spending data closely so far in 2020. The same cannot be said of the tech-heavy Nasdaq 100 index, which has been the big outperformer (Figure 9). Confronted with the combination of the pandemic, which dramatically accelerated existing trends that were already benefitting technology companies, along with quantitative easing and much larger budget deficits, investors likely concluded that the extra liquidity created by central banks was best placed in technology stocks and precious metals – two assets that are not normally highly correlated.

Figure 9: Nasdaq 100 peeled away from consumer spending data and other equity indices

This raises difficult questions for central bankers and investors going forward:

  • Was the recent pullback in precious metals and equity prices related to central banks slowing QE?
  • If so, what happens if equity prices suffer a deeper correction? Would central banks have to step in with another around of QE?
  • What is the ultimate exit strategy? How do central banks manage their balance sheets, asset prices and investor expectations simultaneously?

We don’t have the answer to these questions, but we suspect that they will be revealed in the months and years ahead. In the meantime, investors are clearly nervous. The cost of options on the Nasdaq 100 and silver, in particular, have been at exceptional high levels for the past several months, indicating that at least some market participants are willing to pay high premiums against the possibility of adverse price moves in the future (Figures 10 and 11).

Figure 10: Silver options were extraordinarily expensive all summer

Figure 11: The ratio of Nasdaq 100 to S&P 500 volatility has been 1.5 on average since August

Bottom Line

  • Central banks’ balance-sheet expansion appear to have benefitted tech stocks, gold and silver.
  • Fed has slowed the pace of QE by 97.5% since the end of June.
  • Other central banks have also pulled back on QE.
  • Did the slowdown in the pace of QE contribute to the recent correction in tech stocks and precious metals?
  • If equities correct further this fall, will the Fed and other central banks feel obliged to ramp up QE again?
  • If so, will that inflate asset prices further, restarting the cycle once again?


All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author(s) and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.

About the Author

Erik Norland is Executive Director and Senior Economist of CME Group. He is responsible for generating economic analysis on global financial markets by identifying emerging trends, evaluating economic factors and forecasting their impact on CME Group and the company’s business strategy, and upon those who trade in its various markets. He is also one of CME Group’s spokespeople on global economic, financial and geopolitical conditions.

View more reports from Erik Norland, Executive Director and Senior Economist of CME Group.

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