HardAssetsInvestor

September 11, 2012

Perfect Storm Of QE3 & Fiscal Cliff May Send Gold Above $2000

Details

We offer our latest analysis on the precious metals market.

Last week, the European Central Bank announced it will resume its bond-buying program to combat the eurozone sovereign debt crisis, spurring intense buying in precious metals.

But while the ECB’s decision was important, the biggest event of this month—perhaps this year—as it relates to precious metals, is Thursday’s policy decision from the Federal Reserve.

Gold and silver have climbed to the highest levels in close to six months on hopes that the U.S. Central Bank will unveil a third round of quantitative easing (QE3) to reinvigorate growth in the world’s largest economy.

Unlike in the past, the majority of market participants believe a QE3 announcement is likely this time around. Indeed, anything short of the announcement of a new asset purchase program will likely be viewed negatively by all risk assets, particularly gold and silver.

But even if QE3 is announced, the details of the program will be scrutinized. Analysts expect bond purchases comparable in size to that of QE2, which totaled $600 billion.

However, some argue that this time around the Fed may state a monthly purchase target of $50 billion to $75 billion and keep the program open-ended.

Either of those outcomes would certainly lead to more buying in the precious metals complex.

In such a scenario, gold may quickly surpass $1800 in the short term, and $2000 by early next year.

For comparison purposes, it may be instructive to look at gold’s price action following the announcement of QE2 two years ago. The yellow metal’s rally began near $1200 in August 2010 after Fed Chairman Ben Bernanke hinted at another asset purchase program. By the end of QE2 in June 2011, gold prices were between $1500 and $1600.

GOLD (Aug. 2010 to present)