How QE3 Affects Gold And Silver

Exactrades July 14, 2012 0
How QE3 Affects Gold And Silver

QE3, which is an acronym that refers to Quantitative Easing (Round) 3.  In the last few months, the short-form has been often used because many analysts and economists believed that an easing program is on the horizon. So far speculations have been mere speculations, but with theUSeconomy growing slowing, QE3 is by no means  off the table. In this article, we will touch upon the basics of quantitative easing and its affects on gold and silver prices.


Quantitative easing is an unconventional monetary policy employed by central banks to stimulate the national economy when conventional monetary policy has been rendered ineffective. The policy oversees the increase in the money supply by buying government securities as well as other securities from the market. Central banks tend to use this measure when, despite the interest rates being lowered to near 0% levels, the regular policy fails to produce the desired results. The implementation involves flooding the financial institutions with capital in an effort to promote an increase in lending and liquidity.


In the United States, the Federal Reserve has so far implemented two quantitative easing policies. The first one (QE1) occurred during the financial crisis of 2008, for obvious reasons. The next one, QE2, was implemented right after Halloween in 2010, as the Fed felt that theUSeconomy was not growing fast enough. In fact for the same reason the markets are expecting QE3 from Fed’s chairman Ben Bernanke, asUSgrowth has been slowing lately. However, over the last three to four months we still have no hint of QE3 from Bernanke. Gold had a few violent plunges here and there, but still remains around the US$1600-level, and silver retreated to its support levels and looks to be consolidating.

So what happens to gold and silver prices if QE3 was implemented? Surely, the economic conditions in theU.S.have been improving. The US dollar has been strong but mostly believed to have benefited from the European sovereign debt crisis, which has plagued the region for months now. So while a QE3 will definitely stimulate theUSeconomy, considering the current global situation, its effect on gold and silver could be limited to an insignificant catalyst. It is strongly believed that or the good part of the upcoming future, the main driver of precious metals prices will be the Eurozone.


The European crisis, where massive bailout figures are being thrown about, is likely to create more negativity around the Euro. The ECB’s solution to remedy the situation will likely take similar form to the Fed’s tried and tested monetary policies that buoy gold and silver for cash injections, money printing and so on. However, given the awful state of European economy, it is not improbable to conclude that the PIIGS nations by no means are the last bailout we will see. In fact, it is largely believed that Eurozone’s loose monetary policies have been the root cause for this crisis, and without any strict measures, the current policy will only provide precious metals with a further boost.

Further, the strongly growing BRIC nations and petro-power Middle-Eastern counties have for years diversified their roughly US$7 trillion reserves into Euro to limit dollar exposure. Now as the EU itself faces a major crisis, there is no other safe-haven currency able to absorb the high flows. The Great Britain Pound, Swiss Franc, Japanese Yen, Canadian Loonie, and Australian Aussie are too small and lack market depth. Therefore, precious metals, such as gold and silver, could inevitably play an important role in the future.

To conclude, the macroeconomic conditions needed for Gold and Silver rallies are still in place. So irrespective of whether the Fed announces a QE3 or not, the parallel actions (or the lack of it) by European counterparts could sustain a rally in precious metals.


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