Friday, January 06, 2012
Among the forecasts for 2012, perhaps the most significant event speculated on is another round of quantitative easing by the Federal Reserve. In order to justify such a move, the current stream of better than expected U.S. economic data would need to turn decidedly sour, threatening another global recession and deflation. As has been repeated ad nauseum, Europe and China are both generating significant headwinds to the global economy. If and when these headwinds begin to impact the U.S., QE3 will be the answer from the Federal Reserve.
Analysts at French bank, Societe General, have produced a number of charts worth reviewing. Given the clear impact the Federal Reserve's multi-trillion bond buying excercises have had to date, another such excercise would certainly be a major determinant to market direction.
The following from SocGen outlines the upcoming sequence ahead of QE3.
Weak Q1 12 GDP and softening inflation pushes the Fed to another round of monetary easing, in 2 steps:
- In January, the Fed pledges to keep real rates at 0% until unemployment falls below 7.5% or inflation moves above 3%,
- In March, the announcement of another round of QE, concentrated on MBS purchases (c. $600bn over 6 to 8 months)
The following chart is very illuminating, and for precious metal investors, QE3 would appear to bode well for gold and silver prices.
Unfortunately, before QE3 can commence, Ben Bernanke and the Fed will need the cover of a potentially nasty deflationary economic environment. With the U.S. economy appearing to operate in a universe apart from the rest of the globe, there is no possibility today of any QE3 action. If the U.S. economy does begin to succomb to the overseas headwinds, expect some volatility for all markets, including gold and silver. However, the end result will likely be some fantastic opportunities for precious metals before the Fed does embark on QE3. If SocGen's forecast proves correct, QE3 will be a boon for precious metals as U.S. dollar debasement kicks into high gear.
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