2 Good Opportunities in Gold


Stephen Leeb Image Stephen Leeb Founder and Research Chairman, Leeb Group

The Federal Reserve's latest round of quantitative easing (QE3) makes gold a good bet for investors more than traders, writes Stephen Leeb of Leeb Income Performance.

The stock market's immediate response to new easing policies from the Fed, nicknamed QE3, was cautiously optimistic: stocks rallied on the day of the announcement, only to trade sideways for a week thereafter.

The action in gold was much more positive, showing a bigger jump in price, followed by generally more enthusiastic trading action. And while modest pullbacks could unfold at any time and without a clear reason, we could again see a $1,900 an ounce price for the yellow metal quite soon.

We have written before on the true economic meaning of the easing policies: cheaper money (which is getting cheaper still) means that risky assets seem more attractive, so the stock market is truly an ultimate beneficiary of QEs.

But if stocks benefits from the flow of easy money, so does the asset whose value increases as the amount of money in circulation grows: gold. Thus, QE1, 2, 3, and further QEs indeed are also very good for the continuing rally in gold.

Of course, if QE1 and QE2 (which despite their grand size, were both limited in scope and duration) have served as launching pads for the new, higher stage of gold prices, then QE3 should help the yellow metal advance even further. That's because with the US economic recovery faltering, the central bankers pulled out all the stops this go-round, and their $40-billion-a-month mortgage-backed bond buying program will continue until the Fed decides it has made an impact.

Moreover, as the official statement put it, "To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens."

We expect the open-ended nature of QE3 to work towards enhancing its inflationary potential.