Should You Buy Gold Before QE3 is Announced?

Markets have been calling for a third round of quantitative easing for quite some time, as U.S. equities have been unable to shake pesky euro zone fears as well as our own debt issues at home. Any news or anticipation from the Fed over the past few months has volleyed markets back and forth, as traders look for Ben Bernanke to ride to the rescue with yet another asset purchasing program. Tomorrow will see a key address from the Fed, in which many are considering to be a make or break moment for 2012. With “Operation Twist” coming to an end in June, the vast majority of analysts and investors are anxiously awaiting for the Fed to make a definitive commentary on QE3 [see also Is Gold Overvalued? The Bearish Case vs. The Bullish Case].

For the most part, the investing universe seems relatively hopeful and even somewhat confident that Bernanke will have no choice but to announce a new program given market weakness. Still, others argue that a renewed program may not help given the current situation in Europe. “The markets may bully the Fed into doing something, or the Fed may do something because it’s in a “try something, anything” mode. But there’s justifiable skepticism over the good it’ll actually do” writes Paul Vigna.

The general sentiment is that QE3 may not do much to boost the economy, but instead keep things from getting worse as a defensive tactic. No matter how you feel about quantitative easing, one thing is for sure, it will be a big opportunity for gold investors [see also Why No Investor Should Own GLD].

Gold and QE3

Another round of QE could mean big things for gold, as investors will flock into this hard asset to protect themselves. First and foremost, QE will mean printing more money and a devaluation of the dollar. That will likely make gold more attractive as it is a great store of value, forcing investors to rush into the yellow metal for fear of losing the value of their hard-earned dollars. Another major reason why gold will probably jump is because of its use as a trading instrument. Once investors hear that QE3 is a go, markets will likely see a temporary boost, but traders will try to cash in on the gold rush by opening big positions, which will likely increase the price [see also Jim Rogers Says: Buy Commodities Now, Or You’ll Hate Yourself Later].

If gold is able to make gains, the only question that remains is how long it will be able to shine before it settles down. For all we know, prices could approach $2,000/oz. again, repeating a similar pattern to last year. Investors will also have to take the euro crisis into account, as any bad news from the East will also create tailwinds for this commodity. Predicting just how high gold could go or for how long it will gain is nearly impossible, but investors can be certain that an announcement of QE3 tomorrow will mean heavy trading for gold for the remainder of the week. All that remains is how investors will choose to act prior to and beyond the Fed meeting concerning this precious metal. So how about it, are you buying gold? Let us know in the comments.

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Disclosure: No positions at time of writing.

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  • Sam

    u are talking if they do QE but what if they do opertion tiest well we see gold rise or drope?

  • Sunil Kumar R K

    Hello sir, Do you have any views on trading delta neutral strategies on gold? With this volatility perhaps it makes sense to put on a straddle on gold..?  Whether gold goes up or down, volatility is likely to expand here.