Monday , 4 December 2023

QE3: Impact on Gold & Silver Returns Should Outshine Impact on Economic Growth – Here's Why


While the Fed’s third round of quantitative easing is fairly aggressive it is unlikely to have a significant impact on the economy – especially if policymakers in Washington lead us over the fiscal cliff. Where QE3 may have an impact, however, is in the commodities market, and in particular gold. Here’s why. Words: 400

So says Russ Koesterich, CFA, the iShares Global Chief Investment Strategist, in an article* posted at

Lorimer Wilson, editor of (Your Key to Making Money!) and (A site for sore eyes and inquisitive minds) has edited the article below for length and clarity – see Editor’s Note at the bottom of the page. This paragraph must be included in any article re-posting to avoid copyright infringement.

Koesterich goes on to say, in part:

For starters the Fed’s actions:

  • may not change the economic fundamentals, but it could continue to support the “risk-on-trade” (assuming we can avoid the fiscal cliff) that we saw following the announcement,
  • the rally may last longer, even though it is not clear that QE3 will change much and
  • a “risk on” rally would most likely benefit commodities.

Longer term, however, the Fed’s move:

  • could support gold in particular.

Historically, the most significant driver of commodity returns:

  • has not been the absolute level of inflation or changes in the dollar – the two factors investors typically focus on
  • but the level of real-interest rates.

This has been particularly true for gold, which has, at least historically, been the biggest beneficiary of low real rates. The argument why this is the case is not hard to understand:

  • In an environment in which real rates are very high, as in the mid-1980s, there is a huge opportunity cost to holding gold.
  • Conversely, when real-rates are low or negative as they are today, there is no opportunity cost in the form of foregone interest.

Historically, this relationship has been so strong that since 1990 the level of real rates – measured by comparing the Fed Funds rate to core inflation – explains roughly 45% of the variation in gold.

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Given the Fed’s recent announcement to extend their guidance on holding the Fed Funds rate between zero and 0.25% until mid-2015, investors have an unusual degree of visibility into future monetary policy. In the absence of a slide into Japanese style deflation –increasingly unlikely with inflation expectations actually rising – real-rates may remain negative for many years.


Given this prospect, while the Fed’ s actions may have only a small impact on the economy, they may yet prove a much bigger deal for commodity and gold investors.


Editor’s Note: The above post may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.

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