The Fed was sensitive to the criticisms it is enabling Obama’s insane debt growth, so in QE3 it switched back to buying mortgage-backed securities from Treasuries for the first time since QE1. And though QE3 was open-ended, the $40b per month was pretty modest by QE1 and QE2 standards. They weighed in at $1750b and $900b respectively, yet a full year of QE3 would “only” amount to $480b if not expanded.
And it is this new open-ended QE3 campaign that has investors and speculators so excited about gold and silver. How will the precious metals fare with potentially unlimited new inflation about to be unleashed into the economy? One of the best ways to gain some insights is to review how these metals did during the rest of the Fed’s QE. So the chart below overlays the QE milestones over gold.
During the time when the Fed’s original QE1 buying was underway, from late November 2008 to late June 2010, gold powered 50.8% higher! This is a heck of a run, but it certainly wasn’t all due to debt monetization. Gold was beaten down during the stock panic too due to flight capital from elsewhere igniting a monstrous US dollar rally. So gold was due to surge in the post-panic recovery anyway.
QE2, which was smaller but harder-core since it focused purely on monetizing Washington’s Treasuries, saw gold gain 24.7% during its lifespan. This is certainly an excellent gain over less than a year. Provocatively, just after QE2 ended gold surged for other reasons. That was summer 2011 when Obama refused to honor a deal with the Congress on reducing spending to secure a US debt-ceiling increase.
The first-ever threat of Washington actually defaulting on its debt drove enormous gold investment demand, but this metal soon grew very overbought. So it started correcting soon before the Fed launched Operation Twist. And the fact that Twist wasn’t QE3 really accelerated this gold selling. Over the entire Twist timeframe with no new monetization, gold drifted sideways to lower. But QE3 is new monetization.
Since gold rallied strongly during both QE1 and QE2, there is no reason not to expect it to respond similarly in the Fed’s young new QE3 campaign. 25% in a year, especially if QE3 is expanded early next year as Fed officials are already hinting at, seems pretty conservative given gold’s QE history. A 25% rally from the day before QE3 was announced would catapult gold up to a record high above $2150!
Read more: http://www.zealllc.com/2012/fedqepm.htm
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