Sunday , 19 May 2024

Why More QE is Coming and What That Means for the Future Price of Gold

Most traders and some economists believe the Fed will step in with another round of Quantitative Easing (QE3) in the first half of 2012. This will pump up the stock market, particularly bank stocks, giving the impression that the US economy can’t be that bad, after all, [but in the process] debase the dollar and reduce purchasing power. [This, in turn, will result in higher]…inflation causing prudent investors to buy more gold. [Let me explain further what I see transpiring this quarter and why.] Words: 718

So says Scott Silva ( in edited excerpts from his original article*.

Lorimer Wilson, editor of (A site for sore eyes and inquisitive minds) and (Your Key to Making Money!) has edited ([ ]), abridged (…) and reformatted (some sub-titles and bold/italics emphases) the article below 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. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Silva goes on to say, in part:

QE3 to Buy Up Toxic Mortgage Backed Securities

This round [of QE] would be huge, as much as $1 Trillion and targeted to support the ailing housing market. Under QE3, the Fed would purchase [those] Mortgage Backed Securities (MBS) – the derivative instruments that bundle thousands of home mortgages into a single, collateralized package – …considered “toxic” assets because they contain subprime mortgages that defaulted, making them very difficult to price in secondary markets…

The next FOMC meeting is scheduled for this week, but there is little chance that the Chairman will announce the new round of bond-buying [then] but listen for Bernanke to list the continuing woes of the housing market, and its drain on the economy and growth. Housing will be the new demon and Ben will excise it with a Trillion dollar dose of his favorite restorative quantitative elixir.

Why Previous QE Effors Failed

The Fed has already injected $2.9 Trillion into the banking system through expanded credit [but it] has failed to turn the ailing economy around. GDP is limping along at 2% or less. Unemployment remains at record highs. Capital is on strike, or out of the country. Adding another $1 Trillion to the Fed balance sheet is not likely to make a positive difference [either]. The technical reason is we have been stuck in a liquidity trap, where no amount of additional easing is effective.

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Austrian economics gives the answer why. Fed intervention created a bubble in the housing market by artificially depressing interest rates. This encouraged malinvestment in housing assets by homeowners and speculators. Federal social engineering embodied in the Community Reinvestment Act, permitted unqualified applicants to receive taxpayer guaranteed mortgages, many of which ultimately defaulted. Government intervention in the markets is the cause, not the cure for our economic problems.

What the Price of Gold is Saying

One indicator cuts through the conflicting themes that affect the markets and the economy is the price of gold [which] is telling us that:

  •  we are not out of the woods yet, and that there are many risks facing the U.S. economic recovery,
  • to expect more volatility in the equity markets,
  • to expect more pain from the European debt crisis, and maybe
  • to expect a military showdown with Iran and that
  • the bull market for gold has a long way to go yet.


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