David Jollie from Mitsui Precious Metals has a research note out looking at QE3 and its likely effect on the prices of gold and silver. He analyses the first two rounds of quantitative easing and notes that silver outperformed gold both times but given “the economic picture is rather different from the periods of QE1 and QE2, … a considerable amount of uncertainty persists”.
Based on his historical analysis, David concludes that QE3 is likely to boost precious metals prices but does not feel that it will be as positive as the previous rounds because
• each round of QE has shown diminishing returns, and
• expectations of QE3 are already priced into the market.
Because David finds “little to no evidence that QE3 will generate any additional inflation” he sees “relatively little reason to buy gold today to hedge against this inflation: it may be more attractive to buy into silver or equities in the short term for most consumers and later to switch into gold [at the end of QE3] to cover for longer term inflation” when “experience says it should start to outperform silver once again”.
Noting that “some in the market believe that the monetary authorities are running out of ammunition”, David suggests that gold could benefit “if faith in governments being able to solve this situation dissipates” with resulting concerns that governments may resort to capital controls and other policies which could lead to either hyperinflation or deflation depending on the approach taken.
David’s final observation is that “the impact of QE on asset prices commences before the onset of QE itself”, which is why non-QE statements by the Federal Reserve are “greeted by a sell-off by the optimists who have pre-positioned themselves.”
