Investing in Gold After QE3
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Many investors have hit the sidelines to watch whether or not the eurozone will dodge increasing doubts about its bailout agreements
It's been just four trading days since QE3 ended and gold prices are already up about $40 an ounce.
Prior to the announcement, gold was trading at six-month highs, but dipped slightly before Thursday's anticipated news. Upon hearing the Fed's decision, gold prices shot up 2% that day.
Here we are on Tuesday and gold prices have slightly dipped with Comex December futures declining $4.50 to $1,766.10 an ounce. Many investors have hit the sidelines to watch whether or not the eurozone will dodge increasing doubts about its bailout agreements.
But we're still a long way from the long-term price target for gold. Can this QE-fueled rise match ones for QE1 and QE2? History does have a way of repeating itself...
Gold prices and the QE3 rally
Société Générale analysts recently wrote, "Gold prices are highly sensitive to the evolution of the monetary base, which expands during quantitative easing. During QE1 and QE2, gold prices increased 36% and 21% respectively."
Just prior to the QE2 announcement ($600 billion or $75 billion per month) in November 2010, gold was trading at $1,355 an ounce and at the end of the run in June 2011, was approximately at $1,500.
But with gold moving so high before the QE3 news, some of its stimulus-induced rally happened already.
"Using QE2 as guidance for potential gains for gold prices, gold is likely to have priced in the bulk of its move higher," Suki Cooper, a precious metals analyst at Barclays Capital, told Reuters.
But that doesn't mean other factors won't push it higher long-term.
Cooper added that between an increase for the physical demand in China and India as well as record-high holdings in gold-backed exchange-traded products, gold will likely hold on to its strength, even if it doesn't climb at the same fast pace.
Plus, central bank action around the world is making gold a screaming "Buy."
Prior to the Fed's announcement, a German court gave the thumbs-up for the $645 billion European Stability Mechanism.
Following the Fed's decision, rumors immediately swirled that Japan and Bank of England may issue stimulus measures.
Plus there's a China factor. The Asian powerhouse has recently implied an additional stimulus measure may be coming to prevent its economy from slowing down further.
QE3 is also different from previous Fed stimulus programs as bond purchases will remain open-ended, and the Fed presented guidance to keep low rates until 2015.
While the Fed plans to keep QE3 going as long as unemployment is a problem, that looks to be an incredibly long timeframe. That little unemployment "problem" of an 8.1% jobless rate isn't going away.
On Tuesday, the Bank of America came out with research predicting a gold rise to $2,400 a troy ounce by the end of 2014 thanks to QE3. On the downside, it isn't likely to go below $1,500.
Gold-related investments for post-QE3
Since the Fed's announcement, gold ETFs have been on the rise.
As reported in ETF Trends, "the physically-backed SPDR Gold Trust (NYSE: GLD) and iShares Gold Trust(NYSE: IAU) have both gained 3.9% in the past week and about 9.0% over the past month."
If stocks are more your thing, there are some gold miners on the rise: IAMGOLD Corp. (NYSE: IAG), Tanzanian Royalty Exploration Corp. (TRX) and Golden Star Resources Ltd. (GSS).
Investors should get used to pricier gold. While some dips could appear due to occasional profit-taking, its long-term bull run continues.
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