Ride This QE3 Rocket to $2,000 Gold and $50 Silver

For all those investors out there who remained uncertain about the forward trajectory of gold and silver prices, Federal Reserve chairman, Ben Bernanke, has just offered you a hand-written, embossed, and gilded invitation to participate in the greatest secular bull market of our time.

With his open-ended pledge to purchase additional mortgage-backed securities at a rate of $40 billion per month, and his simultaneous extension of the zero-bound interest rate through at least mid-2015, Bernanke has launched his third QE rocket to send gold and silver on yet another explosive ride to the upside.

Operation Twist will now extend through the end of this year, yielding a combined increase of $85 billion per month in the Fed's holdings of longer-dated securities. Economists at BNP Paribas project that the Fed is likely to tack-on additional purchases before long to sustain that $85 billion monthly expansion rate through 2013, and that QE3 is therefore likely to result in a $1.17 trillion expansion of the Fed's balance sheet.

How gold and silver are likely to respond
For a hint at how this latest Fed action is bound to impact precious metal prices and the performance of related bullion, mining, and royalty equities, let's turn our Foolish gaze to Bernanke's last big balance sheet expansion that's now known ubiquitously as QE2. That $600 billion bond buying program was announced in early November 2010, and ran through the end of June 2011 at a pace of about $75 billion per month. Gold traded for $1,355 per ounce prior to the announcement, though the market's anticipation of further easing -- which I noted at the time -- obviously played a role in the metal's preceding strength from around the $1,250 mark. Silver stood near $25 per ounce at the start of the program, though some portion of the metal's preceding rally from beneath $20 per ounce can be fairly attributed to anticipation of the Fed's intervention.

Following the launch of QE2, I offered my own prediction that gold and silver would "continue through near-term price targets of at least $1,500 and $30 per ounce" as a result of that monetary blitz. Sure enough, by the end of June 2011 gold stood precisely at $1,500 per ounce, while silver delivered a remarkable 38% surge to land just about where it stands today near $34.50 per ounce. A position in my preferred gold and silver bullion proxy -- Central Fund of Canada (AMEX: CEF) -- would have returned 16% during QE2. And although the mining stocks at large struggled to outshine the metals during this period for reasons I've discussed before, several noteworthy performances like Sandstorm Gold's (NYSE: SAND  ) 85% advance and Endeavour Silver's (NYSE: EXK  ) 74% ride nonetheless permitted successful stock pickers to share in the Fed-borne bounty.

Finally, before we move to my specific projections for the effects of QE3, one more prediction from my 2010 discussion of QE2 warrants our attention here. At the time, I shared my outlook that "additional rounds of quantitative easing" remained a "foregone conclusion." My confidence in that macroeconomic outlook, furthermore, is precisely what permitted me to weather the storm through the deep trailing correction in mining equities and remain in position for this ongoing resumption of momentum. Looking forward from the recently announced QE3, I continue to perceive "an unseemly vicious circle" that is likely to trigger a continuum of (global) monetary intervention that Tanzanian Royalty Exploration (NYSE: TRX  ) chairman, Jim Sinclair, has aptly termed "QE to infinity."

The big picture for silver and gold
The Federal Reserve's latest easy money action does not occur in a vacuum. It comes, rather, right on the heels of a key German court decision that cleared the way for the proposed $645 billion European Stability Mechanism. With the central banks behind the world's two primary reserve currencies now expanding their balance sheets in tandem, we've entered a new chapter in the global saga of competitive currency devaluation. As an extension of the resulting downward pressure on both currencies, these actions create an imperative for other nations to prevent their own currencies from gaining ground and thwarting their own respective efforts to promote economic growth.

Switzerland has been perhaps the most vocal example of a country committed to defending a specific exchange rate to the euro. China has already signaled its intention to spawn another round of stimulative infrastructure investment. Mere hours after the Fed's announcement, speculation is already swirling around additional easing likely from both the Bank of Japan and the Bank of England. What we're witnessing here is truly a global monetary event whereby the nations of the world are engulfed in a furious "race to debase" their respective fiat currencies essentially in lockstep with each other. Only one currency exists that stands to gain as this all unfolds, and that currency is gold. And since silver is harnessed to gold by a permanent yet flexible elastic band, it too comes along for the ride (and often with even greater percentage moves). The broader monetary outlook here is what supports my long-term expectation that gold will ultimately continue to Jim Sinclair's target of $3,500 per ounce.

Follow this latest action to fresh all-time highs
Although it may be difficult to predict the precise scale of QE3 given its open-ended structure, I think we can make some safe presumptions about the program that render fresh new all-time high prices for gold and silver an extremely likely near-term outcome. For starters, I think it's safe to expect QE3 to eclipse the $600 billion scale of QE2, and in fact I consider BNP Paribas' anticipation of a $1.17 trillion tally quite reasonable under the circumstances (even if any follow-on announcement may be dubbed "QE4"). Second, I expect related monetary interventions from other major central banks to add more fuel to gold's fire. And finally, I think it won't be long before public consensus grows around the inevitability of additional global monetary easing since few seem to view this latest set of moves as a quick fix for an immensely challenging global economic condition.

With those and a host of additional factors in mind, I am following up on my successful prediction of the impact of QE2 on gold and silver prices by offering $2,000 gold and $50 silver as comfortably conservative interim targets for this latest major rally of the ongoing precious metals bull market. And as a bonus recommendation of a specific vehicle for gold, I like IAMGOLD's (NYSE: IAG  ) chances of mounting a major advance. For silver, Aurcana (NASDAQOTH:AUNFF.PK) could perform beautifully if the company delivers a smooth ramp-up at its new Shafter mine, while First Majestic Silver and Endeavour Silver offer the industry's top management teams paired with some truly gorgeous mineral assets. I own each of these stocks myself, and have issued corresponding bullish CAPScalls at Motley Fool CAPS. To join our regular discussions of these and other compelling gold and silver picks, please bookmark my article list or follow me on Twitter.

Looking for more ideas? Download The Motley Fool's special free report "The Tiny Gold Stock Digging Up Massive Profits." Our analysts have uncovered a little-known gold miner that we believe is poised for greatness; find out which company it is and why we strongly believe in its future -- for free!

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Aurcana, Endeavour Silver, First Majestic Silver, IAMGOLD, and Sandstorm Gold. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (20) | Recommend This Article (60)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 14, 2012, at 5:48 PM, Frankydontfailme wrote:

    Open ended MBS buying? QE-infitity? Someone has to pray for the gold bears.

  • Report this Comment On September 14, 2012, at 10:55 PM, charliedawgg wrote:

    So I to understand that IAMGOLD is replacing Primero as your top pick? If so (or if not), are you drawn to IAG based on potential for growth? What specific criteria does IAG meet that makes you so optimistic? I guess what I'm asking is...if you had to put your sidelined cash on one horse Monday morning, would you go with IAG, BRD, CGR, PPP...? Do I ask too many questions?

    Thanks, as always.

  • Report this Comment On September 14, 2012, at 11:30 PM, XMFSinchiruna wrote:


    PPP has surged 140% over the past few months. While it remains a core holding of mine even after booking some profits recently, I can no longer place the stock within the category of those gold stocks with the most explosive upside from this juncture.

    For that matter, IAMGOLD is not what I would characterize as an aggressive multi-bagger pick, but rather strikes me as a fairly easy double from here. I won't buy a gold or silver stock that I can't envision doubling, and from here I suspect IAG could double before Primero does. I'm not quite ready to declare it as my new top pick, but I am certainly quite bullish on the compay's outlook.

    Claude Resources (CGR) is a top-five holding in my personal portfolio. If I had some additional cash to deploy here, Claude Resources and Impact Silver (ISVLF) would be top contenders. I look forward to the time when both of these companies command a more substantial market cap that facilitates their inclusion in these sorts of discussions.

    With respect to Brigus Gold, I must confess that I find it enormously difficult to watch that stock still struggling to break above $1 while so many gold stocks have already yielded substantial gains. That represents a significant opportunity cost, and unless we get a significant breakout soon I may be forced to terminate that recommendation as an unfortunate underperformer. I still believe that the stock trades substantially beneath fair value, but the opportunity cost of waiting for the re-rate over all this time is really adding up.

    I'll try to follow-up shortly with an updated discussion of my top picks for gold and silver.

  • Report this Comment On September 14, 2012, at 11:40 PM, XMFSinchiruna wrote:
  • Report this Comment On September 15, 2012, at 7:50 PM, TMFDarwood11 wrote:

    I'm not a sophisticated investor, or a gold bug. That's why I bought a bit of GLD a couple of years ago.

    It seems to have held up very well, as compared to IAG.

    I don't know much about the up side, but am I missing something?

  • Report this Comment On September 15, 2012, at 11:07 PM, SN3165 wrote:

    Hi Sinch,

    Can you explain further why you like Claude? At first glance I see a lot to like, but also some possible warning signs - $19.2 mill debt, 1.6 mill cash (August presentation). Cash costs per ounce over $1,000.


  • Report this Comment On September 15, 2012, at 11:23 PM, SN3165 wrote:

    FYI - Insider Buying in Claude

    Sep 7/12 Longo, Peter Anthony Direct Ownership Common Shares 10 - Acquisition in the public market 25,800 $0.770

    Sep 4/12 Sep 4/12 Nieman, Ted John Direct Ownership Common Shares 10 - Acquisition in the public market 1,050 $0.700

    Aug 23/12 Aug 21/12 McMillan, Neil Direct Ownership Common Shares 10 - Acquisition in the public market 100,000 $0.650

  • Report this Comment On September 16, 2012, at 8:33 AM, XMFSinchiruna wrote:

    Darwood, for a wide range of reasons too numerous to cite here, the mining equities at large have performed poorly over the trailing couple of years. This has pushed mining equity valuations to a 15-year low relative to the gold price, and dropped per-ounce resource valuations to the bargain-basement floor. IAMGOLD faced its own share of challenges executing on previously anticipated production growth, but in my view has done a solid job of retooling its growth outlook while retaining one of the best balance sheets in the business. In short, I find ample reason to expect that quality mining equities are likely to outperform gold quite dramatically going forward, just as I would expect the IAG share price to double well before gold does from here.

  • Report this Comment On September 16, 2012, at 8:52 AM, chiquis10 wrote:

    Does anyone here actually own precious metals

    In their portfolio? I cant seem to find much talk about

    Preciuos metals in the FOOL.

  • Report this Comment On September 16, 2012, at 9:12 AM, XMFSinchiruna wrote:


    With pleasure! In Claude I think we have an ideal long-term growth scenario in the works as the company capitalizes upon extremely successful brownfield exploration at Seabee to raise output sequentially over each of the next 4 years. I expect that cost structure to improve as volume increases, and view Seabee critically as the funding mechanism for further work on expanding resources at Seabee, developing Amisk which I am already convinced is an economically viable project, and continuing to explore Madsen as they're presently doing. Given today's obscene valuation for 4 million ounces of gold and the promise of more to come, I consider Claude one of the greatest organic growth stories out there.

  • Report this Comment On September 16, 2012, at 9:18 AM, XMFSinchiruna wrote:


    You may wish to bookmark or RSS my article feed, as I write predominantly about precious metals.

    You'll also find plenty of discussions about gold and silver stocks both at the Motley Fool CAPS blogs, and within the discussion boards under "metals & mining".

  • Report this Comment On September 17, 2012, at 10:26 AM, constructive wrote:

    "Switzerland has been perhaps the most vocal example of a country committed to defending a specific exchange rate to the euro."

    Denmark, Latvia and Lithuania have Euro pegs in their constitutions. Can't get much more vocal than that.

  • Report this Comment On September 19, 2012, at 2:22 AM, XMFHelloNewman wrote:

    Christopher, you do some fine work. The Fool is fortunate to have you as a writer.

  • Report this Comment On September 19, 2012, at 9:51 AM, XMFSinchiruna wrote:


    Thank you so much!

  • Report this Comment On September 19, 2012, at 3:05 PM, XMFSinchiruna wrote:

    Please find and enjoy my follow-up article:

    5 Juicy Picks for the Ongoing QE3 Gold Rush

  • Report this Comment On September 19, 2012, at 9:58 PM, somrh wrote:


    As I noted in my other thread I have reservations about inferring much from such a small sample size. If, in fact, you believe that the QE does offer a distinct dynamic, then we really don't have adequate information to make decent predictions. How gold behaved in the last 2 QE may simply be an anomaly for all we know.

    Regarding currency debasement, consider the period between Sept 1980 and March 2001 (yes, I was deliberate in my choice... hindsight ftw).

    During that period here's what we saw:

    M0: +346.5%

    M2: +222.5%

    Purchasing Power: -55.6% (as measured by CPI)

    Gold: - 61.3%

    In spite of good sized expansion of the money supply and a good sized loss in purchasing power of the dollar, gold actually lost more purchasing power.

    So why should we ignore such an event like this from happening today?

    I actually think we shouldn't. In particular, I think there is actually some evidence for "mean reversion" of Gold/CPI ratio. The idea comes from this paper:

    I actually use the idea to model real gold returns here:

    The average Gold/CPI has been around 3. It's currently about 7.

    So my concern is that there may be good reasons to believe gold will go up in the short term, long term I'm not convinced returns will be that great. They could turn out lousy.

    As an example, if we get 4% annual inflation over the next 10 years and Gold/CPI reverts to 3, then Gold would be sitting at just over $1000/oz.

    Do I think it will happen? I don't know. I don't think it's a good enough short thesis but it does keep me from buying the stuff.

  • Report this Comment On September 20, 2012, at 10:35 AM, XMFSinchiruna wrote:


    I'm relieved to hear you won't be shorting gold, and respect your decision to steer clear even though I obviously disagree with your outlook.

    One can skew data to their needs almost without limit by utilizing, as so many of gold's detractors conveniently do, the 1980 peak to the 2001 trough as their cherry-picked data sets.

    Again, I appreciate your efforts to approach the topic through a rigidly quantitative paradigm, but in this case it will certainly lead you astray of gold's looming price appreciation. A lot of smart people, including some fellow Fools whom I otherwise admire, have written extensively on their expectation for mean reversion in gold vis-a-vis CPI, and their correlative interpretation that gold is therefore overvalued. Unfortunately, however, it is a wrong-minded approach to understanding gold in the context of a global currency event like the one presently unfolding.

    CPI, for starters, is an outright fiction built upon estimation parameters that are not equivalent to those employed historically (seriously undermining related attempts at historical quantitative analysis). Please note that those revisions over time have consistently had the effect, conveniently, of reducing CPI as compared to preceding formulae.

    But by far the biggest flaw in the mean reversion hypothesis for gold, meanwhile, is found in the universe of dramatically and in many cases permanently altered contexts for the gold price that must be ignored in order for the expectation to remain a rationally defensible one. Reversion to the mean could work well in an "all other things being equal" world, but that is definitely not the world we live in today.

    We have already seen beyond a shadow of a doubt, for example, that gold is NOT the barbarous relic that the financial world wrongly presumed it was during the period you cite when typical allocation to gold fell essentially to zero. Rather, it is an indispensible anchor of timeless value, and the only globally recognized currency that is utterly immune to destructive monetary policy. Unless you have good reason to expect that the conceptual paradigm through which the world approaches gold will revert back to where it had trended before this currency crisis erupted, and therefore that investment demand for the metal will promptly plummet to pre-crisis levels, there is no reason to anticipate a reversion to a post-Bretton Woods mean that was characterized by an improper expulsion of gold from the conscience of our financial framework.

    Similarly, a reversion to the mean hypothesis depends upon an unaltered supply/demand balance that does not make allowances for sweeping and permanent changes on either end of the spectrum. The structure of global mine supply has shifted. The predominance of truly massive deposits is waning, in favor of a greater number of smaller deposits, and this trend has real impacts upon the industry's all-in cost structure (entirely apart from inflationary cost pressures that might be partially captured in the CPI).

    Again, this sort of geological reality is not reflected in a quantitatively derived expectation of reversion to the mean, and offers another example of the myriad real-world factors and context-altering fundamental developments that render mean reversion an unfortunate conceptual paradigm through which to approach the ongoing secular bull market for gold.

  • Report this Comment On September 20, 2012, at 5:45 PM, somrh wrote:


    I agree that the time period I looked at was cherry picked but so is simply looking at QE1, QE2 :) The broader point I'm making is that the issue is far more complicated then QE => Increase in Gold price; that 20 year cherry picked time period shows that. But I think you acknowledge that.

    I do have plenty of reservations on using CPI. (For example, if the "equation of exchange" is valid, then the "price level" is actually a vector, not a scalar so CPI isn't an appropriate measure of the "price level".) I concur it's a fiction but it's a useful one. If you have a better one I'd be interested. I can only work with the tools I have.

    If I'm understanding you, you seem to have in mind some "proper view of gold" as a "store of value", "currency", etc that the markets have "recognized" and that we will not revert to some "previous view". I'm guessing we won't see eye to eye on this point and I certainly don't have any opinions on what markets are capable of (if anything, I'd say they are capable of anything.) So I still think mean reversion is entirely possible.

    I think you are correct, however, that there are other elements involved here. My goal was just to look at the QE element as I've contended the issue is more complicated. No doubt if there are supply constrains, increases in demand (from investors), the emerging demand factor (I posted a link to a GMO article in one of my blogs) and other factors those need to be considered.

    The fact that price of gold is driven largely by "investor demand" as opposed to say demand for is a risk I don't particularly like. In terms of the supply/demand argument, I think commodities that are driven more by industrial use I find more appealing but to each his own.

    The theoretical problem I have with the QE approach is:

    (1) I think the "inflation" case is typically overstated.

    A lot of that, I suspect, has to do with the "money multiplier" theory taught in econ courses. The equation is more or less correct, but the causality is backwards.

    (2) it's possible that those fears are already "priced in" (To be clear, I have no idea what the "correct" price of gold should be but I'm open to the possibility that it could be overpriced or underpriced at any given time.)

    In any event, I do hope you know that I prefer discussing things with people that disagree with me. It will be interesting to see how this plays out.

  • Report this Comment On September 20, 2012, at 8:25 PM, XMFSinchiruna wrote:


    I thank you very much for the dialogue, and I'm delighted to show that debating these hotly contested topics can occur with decorum.

  • Report this Comment On October 02, 2012, at 2:06 PM, kurtj3 wrote:


    Any thoughts on the CGR production guidance released this morning? Looks to me like they're on track, but the market took them down 6%. Your thoughts?



    (building a position in Claude)

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