It’s been just six weeks since the geniuses at the US Federal Reserve decided that they could fix the world — with a third round of free dollars, ‘QE3‘.
And already…there is talk of DOUBLING the pace of this program.
Question: Do you have a high unemployment rate, a slow economy, or are you drowning in debt?
No problem! Just print your way out of it!
What do you mean it didn’t work last time? Well this time we’ll keep going – and keep increasing it — until it does work…To infinity and beyond!
But what this could do to the price of real assets, like gold, is mind-boggling.
Those institutional gold price forecasts of $2400 an ounce in two years suddenly look a bit weedy!
On the 13th September 2012 the Fed started a third round of quantitative easing, or QE3. It will create $40 billion out of thin air each month, to buy bonds. This will carry on until either the US unemployment rate falls, or someone blows up the Fed.
And we know people are already considering the latter.
Forecasting the Gold Price in Two Years
From experience, we know that when the Fed increases its balance sheet during these programs, the US gold price increases very closely with it. If the balance sheet increases 20%, the gold price also increases around 20% too.
In fact if you statistically calculate the relationship between them, the correlation is around 95%, which is about as certain as anything gets in finance.
If this relationship holds true, you can plug in the projected numbers for the Fed’s balance sheet over the next few years — to make a pretty fair forecast of where gold will go next.
Assuming the Fed keeps adding $40 billion a month for two years, Bank of America has already projected a gold price target of US$2400 per ounce in two years time. That’s a 40% gain from today’s price.
The Golden Road to $2400 Per Ounce Gold
After getting a bit ahead of itself in September on the initial excitement, gold has cooled from nearly $1800 to closer to $1700 during October.
Looking at the chart today, I suspect that we’re now looking at a good entry to the start of a long steady rally. This could make the coming weeks one of the best opportunities to buy gold — and also gold stocks.
It’s a good proposition as it stands, but already it looks as though the Fed could be about to turn the heat up.
It looks like the Fed will now INCREASE its asset purchases from December.
Goldman Sach’s chief economist, Jan Hatzius, reckons the Fed will step up its purchases from $40 billion a month — to $85 billion a month.
Seeing as ‘Government Sachs’ has time and again somehow magically ‘predicted’ the Fed’s next move — it pays to listen to them.
This would be to make up for the end of that fizzer Operation Twist, which expires in the coming months.
But winding up Operation Twist (which didn’t increase the balance sheet, it just switched the Fed’s focus from short dated bonds to longer dated bonds), to replace it with QE (which WILL increase the balance sheet), would see a measurable effect on the balance sheet…and therefore the gold price.
So if Goldman Sachs is right, and it normally is when it is talking about the Fed, the result could be a more than doubling of the already rapid pace of gold price appreciation.
IF this happens, then I calculate we could see $US gold in the region of $3150 / ounce in just over two years. That would be an 85% increase from today’s price!
This is a tantalising possibility, though frankly we wouldn’t need this to happen for gold to be a good investment today. On its current path, decent gains are already highly likely.
Why You Should Consider Gold Stocks
Of course, for Aussie investors, we have the headwind of the Aussie dollar to think about.
As it rises, it erodes our gains — like a swimmer (gold) fighting a current (the Aussie). The ever-rising Aussie (and ever-falling US dollar) is the reason that the annual gain for Aussie dollar gold in the last decade was 11.3%, while for US dollar gold it was 17.6%.
The question is: if gold were to soar to $3150 by the end of 2014 on the back of massive QE3…then where would the Aussie dollar be?
QE tends to nudge commodity prices up, which in turn tends to drag the Aussie up. So there is a real risk of a big rise in the Aussie in the next few years.
So unless the Aussie dollar falls, Aussie bullion holders won’t make the same gains on gold that the Americans will. However there is a gold-ETF called QAU which neatly gets around this, and is well worth a look.
Otherwise, quality ASX gold stocks are one way for you to increase gold gains. This can be riskier, as you take on a multitude of company-level risks. And a gold mine has many moving parts, any number of which can go wrong.
But get it right, and these risks are rewarded in spades.
And for the first time in 18 months, gold stocks are finally rising faster than gold.
They have been savage underperformers for a long time. But slowly and surely, quality gold stocks are now on their way back up again.
This has been on the prospect of profit margins swinging from ‘under pressure’ to ‘pay day’.
It is also on the promise of more stocks paying dividends.
Gold stocks are once again ready to give that long elusive reason to buy them — LEVERAGE.
Of the three gold stocks I’ve recently tipped to Diggers & Drillers readers, the first is already up 30%, while the two more recent ones are still on the launch pad. They just need gold to turn back up again, to power some gold-leveraged gains.
But I think gold is now marking its next turn up already, with a bounce from $1700 shaping up.
It just needs a catalyst to support this.
And that 800-mile-wide mega-storm moving up the Eastern seaboard, ‘Hurricane Sandy’, which is about to smash into New York…could be exactly that.
Dr Alex Cowie
Editor, Diggers & Drillers
From the Port Phillip Publishing Library
Special Report:
After the Bust
Daily Reckoning:
Australian Banks at Risk to the Core
Money Morning:
The Australian Media: Big Losses, Big Potential Gain
Pursuit of Happiness: Even Children Aren’t Safe from Government Groping
