How QE3 Affects Price Of Gold

by admin on September 17, 2012

On 13th September, the Federal Reserve Chairman Ben Bernanke erased the doubts encircling the market by announcing the third round of Quantitative Easing, or QE3. This time it is big, US$40 billion a month to buy mortgage backed securities. More importantly, the Fed will continue buying until there is improvement in its stumbling labor market where unemployment stands at 8%.

Just to give a quick intro to quantitative easing, it is basically the printing of more US dollars and keeping the economy flush with cash. With the increased supply of USD, interest rates will be low and people will find no value in leaving their monies in the bank. This leads to more spending in the economy and, in theory, gets the economy up and running again. At least this is what the Fed foresees.

Gold Price To Be Boosted By QE3

How Gold Price Fared During Previous Fed Quantitative Easing

As with the previous 2 rounds of Quantitative Easing, gold investors will benefit from the subsequent rise in gold price. Just to recap, gold price hit a high of  around $1920 per ounce in 2011 which coincide with the end of QE2. Since then, gold price has retreated to $1520 per ounce and the current $1770 per ounce. However, with QE3 announced, Gold, Silver and Aluminium will all benefit the greatest. The physical demand for gold has remained robust at its current level and as we enter the Indian wedding season in the last quarter of the year, prices of gold is expected to trend upwards. Investors who find it more worthwhile to invest their cash will prefer Gold over other commodities. It is able to retain its value in the long term with returns. Hence, it will not be too bold an estimation to make if we say the price of gold should hit $1900 by the end of 2012.

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