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Ladies and gentlemen, we have a confirmed liftoff.
Last week, Fed chairman Ben Bernanke committed a further $600 billion for direct purchases of Treasury debt over the next eight months, and already attentions are turning to the likelihood that this second round of quantitative easing will not be the last.
Given the persistently distressed condition of state and municipal budgets, housing (and "foreclosure-gate"), derivative markets, pension fund shortfalls, and the power of political expediency to block either spending cuts or tax increases of any significance, I for one consider additional rounds of quantitative easing as, unfortunately, a foregone conclusion.
As the only currency not subject to intentional debasement or counterparty risk, gold continues to serve its historic role as the ultimate barometer for impairment among fiat currencies like the dollar. Bernanke's predecessor Alan Greenspan has called gold "the canary in the coal mine," stating that "gold still holds reign over the financial system as the ultimate source of payment."
Over the weekend, World Bank president Robert Zoellick ruffled more than a few Keynesian feathers when he championed a new global currency regime that would "consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values."
The stage-two trajectory
Less than three months ago, I forecasted a looming parabolic surge in gold and silver that would carry the metals to fresh highs. Since that time, gold has appreciated nearly 15% and broken $1,400 an ounce, while many red-hot junior gold producers like Aurizon Mines (AMEX: AZK ) and Golden Star Resources (AMEX: GSS ) have tacked-on more than 20%. Bernanke's latest monetary intervention can well be viewed as the igniting of a second-stage booster rocket.
Silver, commonly known as the "poor man's gold," has convincingly broken out from behind the shadow of its yellow counterpart recently. As recently as this past July, I decried the unsustainable nature of the then-prevailing price ratio between gold and silver, and maintained that silver would experience a meaningful surge to bring that ratio closer to historic norms. Whereas one ounce of gold in July could be traded for 67 ounces of silver, that same conversion would yield only 52 ounces of silver today, and silver has surged in price 50% in the interim. Endeavour Silver (AMEX: EXK ) CEO Bradford Cooke also correctly recognized that silver stood poised to close the anomalous gap in valuation between the two metals.
Last week's allegations of suspected manipulation of the silver market by CFTC commissioner Bart Chilton, furthermore, could serve to embolden silver's advance.
On the heels of Bernanke's unveiling of the "QE2" money-printing blitz, I see strong potential for gold and silver prices to continue through near-term price targets of at least $1,500 and $30 per ounce, respectively, before the onset of another inevitable correction. My long-term price targets for $2,000 gold and $50 silver remain unchanged since 2007, though frankly they begin to appear grossly conservative the more this disappointing forward trajectory of the U.S. dollar comes into clear view.
How to ride a rocket
Aggressive rocket-riders eager to maximize potential upside will no doubt cheer last week's launch of the Global X Gold Explorers ETF (NYSE: GLDX ) , but Fools are reminded to consider the enormity of recent upside moves from many of the fund's major holdings. I think it's a terrific, aggressive investment vehicle with massive upside potential, but I'd be inclined to acquire a stake rather gradually.
Those searching for outsized gains that have yet to materialize may wish to give gold explorer Rubicon Minerals (AMEX: RBY ) a close and timely inspection. Rubicon is a top-ten holding of the new ETF, and has been discovering ultra-high-grades of gold within the F2 gold system of its Phoenix project in Red lake, Ontario, throughout the several years that I have held the explorer's shares. At long last, the company is preparing to release an official resource estimate for the F2 deposit sometime in November, and I suspect the market will be pleased with the scale of the deposit once revealed.
I have already highlighted Hecla Mining (NYSE: HL ) as a solid choice for post-manipulation silver, and I would offer long-standing laggard Coeur d'Alene Mines (NYSE: CDE ) as a turnaround story in the making.
Coeur remains somewhat choked by debt and royalty obligations, but a considerable growth spurt combined with rapidly declining costs signals a robust recovery to this embattled and Foolish shareholder. With nearly 270 million ounces of silver in reserves, and another 180 million ounces in measured and indicated resources (not to mention 2.9 million ounces of gold in reserves), I still detect a strong pulse in this hitherto underperforming miner. As an example of the operational improvements under way at Coeur, the company managed to abruptly reduce costs at its Palmarejo mine from $10.78 per ounce in the second quarter, to an attractive $0.15 per ounce in the third quarter.
Whichever vehicles Fools ultimately choose, gold and silver miners (and successful explorers) have very clearly earned your consideration for even a small allocation within a well balanced equity portfolio. Precious metals remain in a long-term secular bull market with plenty of room to run. I encourage readers to reveal their own selections, and to discuss their percentage allocations to precious metal stocks, in the comments section below.