The Implications of QE3 For The Price of Gold
You may have heard about the QE3 but aren`t sure what it means in terms of the economy, investment market and the price of gold. The QE3 is likely to impact all corners of the market, but the price of gold is one of the areas that will continue to benefit from this government monetary policy announcement.
The term, “QE” stands for quantitative easing, a non-standard monetary policy central banks use to stimulate the economy when the current monetary policy is failing to have an impact. The “3” simply stands for the third round of such an event, which occurred in September of 2012.
The previous rounds of non-standard policy announcements were referred to as “QE” and “QE2″ respectively and also impacted the prices of gold and other precious metals. However, the QE3 appears to have had more of an impact than its predecessors.
The QE3 policy refers to the Federal Reserve`s decision to purchase billions of dollars in mortgage-backed securities indefinitely and keep interest rates set at zero percent for the next three years at least. It also includes the possibility that the board will make more purchases to help bolster employment rates and take other measures to stimulate the economy for the foreseeable future. The other measures were not specified in the announcement but were referred to in a general sense.
After the QE3 announcement was made, the impact was immediate. Commodity and stock prices went up while the strength of the U.S. dollar went down. Meanwhile, gold prices shot up by more than two percent, showing the correlation between the QE3 and the price of gold.
Historically, anytime the market flounders or the weakness of the economy becomes an apparent issue, the price of gold rises as a result. The QE3 announcement confirmed what many already believed. People and businesses in the U.S. are saving more instead of spending and putting the money back into the economy.
Consumers will continue to do so while the market is unstable. High unemployment rates, tighter lending requirements, an uneasy stock market and other financial concerns have driven consumer confidence down, which makes it harder for businesses to grow and survive.
The uncertainty in the economic policy changes and the 2012 presidential election may also have played into the spike in the gold value after the QE3 announcement. With all these factors paired together, precious metals, including gold, become a sounder investment. More people look to buy gold instead of investing their money in an unstable market, so the price of gold naturally goes up in line with the public demand.
Gold prices have risen steadily over the last decade, with economic instability being the biggest driving factor. Financial information websites, such as Simply Finance, provide ongoing market data. Since the QE3 included very open-ended aspects, investor fears drove the price of gold even higher, a common occurrence in uncertain times. Unless employment rates and other areas of the market improve, the QE3 policies will continue and the price of gold will continue to rise as a result.
In the video below Dr Robert P. Murphy shares his controversial view about QE3:
Filed under: Investment Information