Gold's 111% Rise: Just Add QE

Ben Bernanke can't seem to stimulate job growth, but he sure can deliver hefty gains to gold bugs.

Since quantitative easing in the USA started in December 2008, unemployment has jumped almost a full percentage point from 7.2% to 8.1% even as labor participation dropped to the lowest level since 1981. About 844,000 able-bodied people are unemployed and aren't even looking for jobs now.

About all the Fed has accomplished so far, in spite of its lofty goals, is padding the coffers of banks and driving up gold prices a whopping 111%. Check out this chart, courtesy of Mining.com.

Two closely related, but distinct, factors are driving the gains. First, diluting the monetary base decreases the value of the US Dollar. That drives up the number of dollars needed to buy a set amount of gold.

The second factor is concern about the relative value of portfolios. Inflation essentially creates a drain on savings. If you are aiming for a 5% gain and inflation is at 2%, you really need to pull in about 7%. Instead of trying to swim against the current as our dollars depreciate, investors choose to buy gold to maintain wealth.

Not only will the Fed's purchase of up to $40 billion in mortgage-backed debt per month further dilute the relative value of the US Dollar, it will also bake in even more risk of high inflation if the economy actually starts to recover.

Imagine what would happen if the $1.5 trillion of the $2.6 trillion monetary base the banks stored away from quantitative easing measures came roaring out into circulation. Now even more will be added in to the total. This chart comes directly from the Federal Reserve Bank of St. Louis.

To make the situation even better for gold bugs, prices haven't even stayed in line with the weakened dollar. The $850 needed for an ounce of gold at the start of 2008 is equivalent to $2,400 an ounce today, after adjusting for inflation.

Current gold prices, around $1772.00, are only 74% of the real record value.

As investors, we may be stymied by Ben and the Fed's ineffective economic manipulation, but at least they are giving us a good way to opt out.

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