SocGen: If Fed Issues More QE, Gold May Surge to $8,500

Posted by - Wednesday, June 20th, 2012

If the Fed does decide to follow through with proposed measures that would initiate a third round of quantitative easing, investors will need a hedge.

Per usual, the hedge of choice will be the precious yellow metal.

The Societe Generale Group issued a research note Tuesday saying that gold will be strengthened in response to further Fed stimulus.

Although gold has lagged behind the stock market in recent months – gold climbed only 6.6% in the first quarter while the S&P 500 jumped up by 12% – many metals researchers believe the drop in price to be an ideal buying opportunity.

Gold fell to a low of $1,520 on December 29 and has rallied moderately since then...

According to CNBC:

The markets remain concerned about the possibility of further QE/liquidity increases in Europe and the U.S., allied to negative real interest rates worldwide.”


Central banks remain favorable towards gold,” he said. “The latest figures from the IMF do not show any dramatic changes among individual members in November but the World Gold Council's published estimate for the first nine months of the year is for an increase of 348.9 tons; it is possible that purchases reached 500 tons last year.” 

Today's gold price is “pretty compelling” if you're considering entering the market, says Tom Essaye, President at Kinsale Trading.

He speculates that gold price has remained week in recent weeks and months as most investors tend to believe the economy will get back up and running more smoothly. When it doesn't get better and when the Fed implements more easing, a tidal wave of investors will flock toward the gold market in search of a safe haven.

As demand increases exponentially, gold is liable to skyrocket in price – it may go anywhere between $1,900 and an unprecedented $8,500

Take a look at how gold price and the U.S. Consumer Price index corresponds to U.S. Monetary base and QE1 as well as QE2:

gold

From SocGen:

  • USD 1900/Oz: To close the gap with the monetary base increase since July 2007, gold would have to rise to $1,900/oz, assuming full transmission from the monetary base increase to the gold price

  • USD 8500/Oz: If gold catches up with the increase in the monetary base
    since 1920 (as it did in the early 80s), its price would rise to USD 8500/Oz.

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