2 Good Opportunities in Gold

10/29/2012 11:45 am EST


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. For Central Bankers, inflation is the lesser of the two evils-they will take it over deflation any day of the week.

Moreover, inflation-when it comes-will be beneficial for all debt-holders, including consumers, as their debt burdens will be reduced if they can pay back depreciated loans in cheaper dollars. As investors, we should also note here that gold is one of the few assets that benefits from both inflationary and deflationary trends.

The Fed's QE3 decision came a week after European Central Bank chief Mario Draghi announced plans for an open-ended bond-buying program on the continent to bring down bond yields in ailing Eurozone countries. And Japan has expanded its own bond buying program now as well: The Bank of Japan upped its asset-purchase target by 10 trillion yen ($126 billion), to 80 trillion, and lengthened the plan's expiration date by six months, to the end of 2013.

We expect this trend of debasing currencies to drag on indefinitely. Longer term, the Fed's policy decision will keep "real" (inflation-adjusted) interest rates in negative territory, and put gold on course for prices that are significantly higher than their current levels.

We continue to recommend that even income investors should have exposure to the price of gold via the SPDR Gold Shares ETF (GLD). Newmont Mining (NEM), the leading gold and copper miner whose shares yield 2.5%, presents another way of participating in the yellow metal's upside. Both continue to be our growth and income recommendations.

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