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QE3 and Loose Monetary Policy Will Make the Rich Richer and Gold Stocks Skyrocket
Pinnacle Digest writes: Bernanke’s QE3 announcement was welcomed with open arms from gold investors. Loose monetary policy, as Clif Droke explains, is always conducive to higher precious metal prices. On top of that, this new QE program has no distinct timeline, which may be the most aggressive yet by Bernanke.
Droke explains that “Gold was up 2% on Thursday’s announcement of the third quantitative easing initiative (QE3). Silver was up over 4%, while gold stocks advanced an average of 5% based on the XAU index.”
The gold bull-run may now last a lot longer than some were predicting just two months ago. Given the fact that the Fed stated it will continue to buy mortgage backed securities until the labor market picks up, it may have just committed itself to loose monetary policy for the next 5 years. It is our belief that gold will hit a new all-time high within the next six months.
Droke explains the severity of this new program by the Fed. He states “According to the Wall Street Journal, taken together, the Fed will be purchasing $85 billion worth of longer-term securities a month through the end of the year, an increase from the $45 billion of long-term bonds it is currently buying each month under “Operation Twist.” It will also be printing more money to fund its mortgage-bond purchases, expanding the size of its $2.8 trillion balance sheet, WSJ said.”
The strategy behind this new QE program is simple. The Fed wants to encourage mortgage lending, save the millions of Americans underwater on their homes by inflating asset prices, lower the unemployment rate by increasing hiring (via a flood of money into the economy) and drive up stock prices (the greatest wealth creator on the planet). The problem with this plan however, is that the people the Fed intends to help, the middle class struggling to keep their homes, or those who have already lost their homes, or the unemployed, have no money to invest, therefor they won’t realize the gains from the inflationary environment. At best, those underwater on their mortgages may recover enough to sell their homes before the next collapse and walk away with nothing gained or lost. Whether or not this new round of QE helps the employment rate is anyone’s guess. That will depend largely on the desire of corporations to hire staff as well as the regulatory environment, which is not controlled by the Fed.
Click here to read Clif Droke’s article on how this loose monetary policy will influence gold stocks.