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To help turn around the lagging US economy and stubbornly high
unemployment, the Federal Reserve recently announced “QE3”.
Quantitative easing (QE) is an action taken by central banks to stimulate
the economy, typically when interest rates are already very low.
QE involves buying financial assets with newly created money. QE
is designed to increase bank reserves, and the demand for loans. Increased
demand for loans increases their prices, and reduces their yield which helps
reduce interest rates across the board. Higher bank reserves means banks have
more money to lend out, and this combined with lower interest rates increases
borrowing, which increases investment and consumer spending. The
whole idea is to give the economy and growth a boost.
As its name implies, QE3 is not the first iteration of quantitative easing
employed by the Fed. QE1 began in late 2008 not long after the collapse of
numerous financial institutions. At that time the market was in a very bad
way, having lost nearly 50% in under a year. QE1 was a much needed fund
injection and helped resume interbank lending and boost investor confidence.
With almost $1.5 trillion in stimulus, QE1 gave the market a massive lift and
helped limit the damage in other sectors of the economy.
The downside to QE programs is they create money out of thin air. Elementary
economics tells us an increase in the money supply leads to inflation. The
more money that is printed, the more expensive goods and services become,
which does work in practice to a certain extent.
The following chart shows US inflation before, during and after QE1 (QE1 is
the blue segment).
Inflation is an indicator for us, not an investment in itself. We
primarily trade precious metals and this is where our focus and interest
lies. Inflation is of massive importance any investor, but those in the
precious metals and commodities markets especially.On the face of it, QE1 had
no measurable effect on inflation. A superficial correlation/causation look
at the chart would imply QE1’s deflationary effects. Not long after it was
began, the price level fell!
Obviously the reality is not so simple. The minor deflation in 2009 was
due to a myriad of causes, including a massive retraction in consumer
spending and business investment post the 2008 crisis. So QE1 did not so much
cause inflation, but more reduced the deflation that was happened at the
time.
With the announcement of QE1, one would have expected a spike in the gold
price. Gold is often considered the traditional hedge for inflation. Gold is
far less
a commodity than it is a currency and as such as prefer to view gold as a
hedge against currency devaluation more than a hedge against inflation.
Unlike FIAT currencies, central banks cannot print gold. Supply is very
constant, as yearly mining production is insignificant relative to the gold
in existence. This makes gold the ultimate store of wealth and protection
against inflated paper money.
Over the duration of QE1, gold gained around 50%.
Not long after QE1 was ended, the recovery began to slow and the Fed
became frustrated with unemployment and weaker growth. More stimulus was
enacted, in the form of QE2. Although much smaller at “only” $600 billion,
QE2 helped the overall situation if not considerably improving it, at the
very least helping to avoid a deterioration.
Gold rose a further 25% on the back of inflation fears once again during
QE2, not as large as the rise during QE1 but keep in mind that QE2 was
less than half as large as QE1. The S&P 500 rose to near pre-crisis
levels and although increasing, inflation stayed within an acceptable range.
From those indicators, QE2 could be judged successful.
Fast forward to 2012 and unemployment is still high, but gradually
decreasing. With more than 6 months since the last round of QE, in January
gold rose $200 as investors anticipated another round of money printing.
This rally was essentially baseless and unfounded and we saw through its
superficiality. Before long, gold corrected back down to the low $1500s.
With a poor May payrolls number, we changed our outlook in early June. The
May NFP payrolls number came in at 69,000 when the forecast was 150,000. This
was a huge miss and with the Fed’s mandate to pursue full employment we
believed this was to be the first trigger for more QE. Accordingly, we got
long gold in the following months and generated some great
returns for subscribers, outperforming
gold 10x over.
We were proved correct in September when Ben Bernanke announced QE3. We
believe this will push gold above its record highs set in 2011 and are so
confident of the yellow metals upside we have made a limited offer to new
subscribers.
If
you sign up for with SK OptionTrader before the end September, we will refund
your fee if gold trades at $1600 in 2012 before trading at $2000.
Looking forward, we are very bullish on gold. QE3 has given gold a
launching pad and we have several open positions to profit from this view. To
see these positions and all our future trading recommendations, subscribe now.
QE3 will inject $40 billion into the economy per month until unemployment
is at satisfactory levels. We believe this will take three years or more,
amounting to total stimulus of no less than $1.44 trillion. This is
incredibly bullish for gold and with the leverage and flexibilty options give
us; we are very excited for the trading opportunities that lie ahead.
As we’ve already eluded, options allow us to greatly
outperform gold. Significant returns are possible in
very short time frames. Options are key to our success and have
facilitated our 505.98% model portfolio growth in just over 3 years.
Subscribe now to join a strong team with a proven, consistent
track record.
$40 billion/month is the planned amount for QE3 at this stage – for “as
long as it takes”. The best result for gold would be no employment growth for
the next several months. This would necessitate further stimulus by the Fed
and this would undoubtedly come as an increase in the monthly $40bln
injections.
We see this as a very likely scenario.
This all paints a very rosy picture for gold. We have several speculative
gold trades currently open and some very attractive ones in the pipeline.
The key thing with options to maximise profit is to time the market well.
This is what we excel at and is how we generate such high returns for our
subscribers. Join now to be part of a winning team, and don’t miss out
on the opportunities that gold is presenting in the very near future!
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