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The Fed’s Quantitative Easing Plans Fuel Rapid Increases in Gold’s Price

By Tuesday, 25 September 2012 01:38 PM Current | Bio | Archive

In the last four years, the Federal Reserve has announced three rounds of quantitative easing (QE). Each new announcement has led to a rapid rise in gold, and this most recent round, QE3, could do the same.

QE1: After the March 18, 2009, Federal Open Market Committee (FOMC) meeting, the Fed announced that it would add another $750 billion (QE1) to its balance sheet. Gold closed at $893.25 in London that day. Gold closed at $1,149 on Nov. 18, 2009, rising 28.6 percent within eight months.

QE2 was announced on Aug. 27, 2010, at the annual Fed meeting of leading global central bankers in Jackson Hole, Wyo. Gold closed at $1,235 in London earlier that day. Gold rose to $1,421 by Nov. 9 and to over $1,900 a year later, up 15 percent in 10 weeks and over 50 percent in a year.

QE3 was announced at the Fed’s most recent FOMC meeting on Sept. 13, 2012, and gold closed in London at $1,733. If we see similar gains as those following QE1 and QE2, we could see gold at a record $1,992 in 10 weeks (up 15 percent), $2,228 in eight months (up 28.6 percent) and over $2,600 (50 percent or more) in one year.

Inflation of the money supply — no matter how well it is disguised or renamed as “quantitative easing” — has almost always led to a rise in the price of gold, since gold cannot be printed or created by alchemy or mined from the earth by political action. When the Fed inflates, the dollar usually falls and gold rises.

For perspective, if the Fed keeps up its new $40 billion monthly QE3 plan through November 2014, they will add another $1 trillion to the monetary base. You can’t raise the money supply that much in less than seven years and hope for anything less than rising gold and a falling dollar.

Sadly, QE is no way to revive an economy either. Japan is now in QE8 and there is no economic recovery in sight for the long-term recession in the Japanese economy. Last Wednesday, the Bank of Japan expanded its bond-purchase program by another $126.7 billion in order to counter any attempt by foreign creditors to sell Japanese bonds. The proven way to wealth is not by printing money, but by encouraging entrepreneurial growth of businesses.

The Fed’s Zero-Interest Rate Policy is Also Bullish for Gold

The Fed’s Zero Interest Rate Policy, now in effect through at least mid-2015, gives gold an “even playing field” with cash and an advantage against any paper currency that is artificially inflated, like the U.S. dollar or the euro. To keep rates near zero, the Fed keeps buying new Treasury debt at auction. Since China and many other nations have slowed down their purchases of U.S. Treasury debt, the Fed is buying up more and more of our federal debt. The Fed now owns one in six dollars of the national debt, which is the largest percentage of Fed debt holdings in history, larger than at the end of World War II. After World War II, the Fed could not raise interest rates for about a decade, due to the massive war debt burden, so we can probably count on seeing this ultra-low interest rate environment last for a full decade.

Historically, whenever the “real interest rate” (i.e., the nominal rate minus inflation) is below 2 percent, gold generally rises. Example: If rates are 1 percent and inflation is 2 percent, the real return is -1 percent, which is very favorable to gold. Even if interest rates are 4 percent and inflation is 3 percent, the real return is +1 percent and gold rises.

About the Author:
 Mike Fuljenz
Mike Fuljenz is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of the NLG award winning Michael Fuljenz Metals Market Weekly Report. Discover more by Clicking Here Now.

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In the last four years, the Federal Reserve has announced three rounds of quantitative easing (QE). Each new announcement has led to a rapid rise in gold, and this most recent round, QE3, could do the same.
Tuesday, 25 September 2012 01:38 PM
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