QE3 – A Dream Come True for Gold Owners?

on Sep 17, 2012

The newly announced third round of quantitative easing of the Federal Reserve immediately prompted analysts to declare gold one of the big winners, the mining news website Mineweb reported on 14 September 2012. Precious metals prices quickly reacted to the Fed announcement, surging to six-month highs.

In short, on 13 September 2014, the Fed announced that it was going to spark recovery by injecting an extra $40 billion into the US economy by means of purchasing mortgage-backed securities, the Financial Times reported. Unlike the previous two quantitative easing rounds, QE3 does not have a defined time limit but will continue until the labour market improves.

Gold quickly reacted to the announcement, with spot prices topping $1,770 an ounce for the first time since February, Bloomberg reported. In addition, analysts hurried to forecast gold rising to $1,785-$1,796 range, according to Reuters data. “The Fed’s move will flood the market with liquidity, which will consequently push up inflation and drive investors to assets known to be good hedges, such as gold and silver”, noted Li Ning, an analyst at Shanghai CIFCO Futures, as quoted by Reuters.

!m[](/uploads/story/376/thumbs/pic1_inline.png)Yet, the prospects for inflation and the subsequent rising safe haven appeal of gold are not the only reasons why analysts are predicting a bright future for gold owners. “Expectations of a stronger U.S. economy resulting from this policy should help industrial demand for industrial base and precious metals, as well as, gold,” points out TD Securities’ Bart Melek, as quoted by Mineweb. “The tighter supply/demand conditions should move prices higher, possibly above their respective cost structures.” TD Securities in particular sees gold jumping to well over $1,800 by the end of 2012, whereas according to Reuters, Shanghai CIFCO Futures’ Li Ning expects that the Fed’s action will provide solid support to gold at least in the short to medium term, helping it “test $1,800, or even $1,900.”

Mineweb reports that analysts interviewed by various news organisations have estimated that the Fed’s move was particularly supportive of the gold market. “Gold, in a way, is a pure currency, and that makes it the most interesting and the most favoured when we see this type of situation with quantitative easing”, Sterling Smith, a futures specialist at Citigroup Global Markets told Bloomberg in a telephone interview.

One of the features of the new quantitative easing programme which is seen as favouring gold is the open-ended nature of the measure. According to Mr Melek, the Fed’s statement that “a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens” implies willingness to tolerate inflation risks. “Gold is a big winner, as the opportunity cost of holding zero yielding assets decreases with this over the longer term,” added Mr Melek, as quoted by Mineweb.
Although gold is undoubtedly the asset which will be most favoured by the Fed decision, other precious metals also gained momentum after the announcement. Reuters reports that silver surged the most in six months, reaching $34.92 an ounce, whereas spot platinum increased by more than 2 percent to a six-month high of $1,713 an ounce. In the case of platinum, however, the price rally was also fuelled by supply concerns on account of the ongoing labour unrest in South Africa’s mining sector. In addition, Bloomberg reports that the London Metal Exchange index, which includes aluminium, copper, lead, nickel, tin and zinc, rose for the fifth straight session, the longest rally in eight months.
“That’s a commodity owner’s dream come true in terms of open-ended quantitative easing,” notes Walter “Bucky” Hellwig, a senior vice president at BB&T Wealth Management, as quoted by Bloomberg. It seems that QE3 might turn out to be a dream come true for the gold owner in particular.


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