Where's Gold When QE2 Runs Out?
No sooner does the Fed announce QE2 than speculation over whether it is enough begins.Prior to the announcement, Goldman Sachs and others estimated we need as much as $4 trillion more in Quantitative Easing before we can expect to see a real turnaround in employment and economic growth.
Today Dave Rosenberg, Chief Economist and Strategist for Gluskin Sheff, corroborates this sentiment.In this morning's Breakfast with Dave Commentary, he says:
The $600 billion of QE2 that the markets have fallen in love with is actually a drop in the bucket next to the $5 trillion of asset buying that would be needed to completely close the output gap and generate a lasting inflation backdrop. According to econometric work cited in the WSJ, even if the Fed comes back with another $1 trillion, the impact would only be to take the unemployment rate down 0.2 percentage points both in 2011 and 2012. So we would still be talking about a 9%-plus jobless rate, which would be at least 300 basis points north of the most conservative estimates of full employment. There may be inflation in commodities but it is the deflation in wages that will end up being the most troublesome development moving forward … across many levels.
The output gap is the difference between current economic output and the output the economy could achieve at full capacity with full employment.Hence, the speculation that more QE is heading our way.
When the Fed made its announcement, it was also suggested that an additional $250 - $300 billion of Fed profits from other investments may be spent on Treasuries.This brings the total potential of $900 billion for this round of QE.Planned to be spent over the next 8 months and considering it may take $5 trillion of QE to do the trick, we could be looking ahead to 7 or 8 more years of QE laden stimulus.
With gold up 20% in just the last 4 months, as we merely anticipated additional QE, it does not take much math to see how and why some experts put gold well above the $5,000 per ounce level.In my opinion, though, what should be more appealing is the consistency and stamina this bull market has demonstrated.Whether in the midst of inflation inducing QE and fiscal stimulus or at the brink of deflation and a double dip, Gold's rise has been steady.
When considering the direction the gold price is headed, one must also consider the effects of another economic shock on the price.We still have multiple states and municipalities on the verge of bankruptcy.One domestic default ansd the entire landscape of the markets changes.
Iran still lurks as a threat to world peace and so does terrorism.Geopolitical unrest could become another driver of the gold price higher.Then there's perhaps the not-so-obvious.If any of the QE does head for gold, the increased gold demand could put sufficient strain on supply to create quick spikes in the price.In case you haven't heard, they can't print gold.And right now a growing percentage of what's coming out of the ground is owned by China and whatever they get their hands on they're not selling.
I can't think of any reason to ignore gold just because the gold price appears to be at record levels.The race track has been built and gold is set to run long after QE2 runs out.