Gold Surges On QE-3 Rumors

By Jun 1, 2012, 3:28 PM Author's Blog  

This morning, after the U.S. Labor Department announced the disappointing non-farm payroll report gold started to surge higher. The catalyst for the rise in gold is the anticipation and speculation of another quantitative easing program by the Federal Reserve. Today, the SPDR Gold Shares (NYSE:GLD) are trading higher by more than $5.00 from the pre-market low to $155.49 a share.

Something that traders must realize is that the Federal Reserve is still in the middle of doing its Operation Twist program. This program is where the central bank sells short to medium term bonds and buys long term bonds in order to push interest rates down. This helps investors and potential borrowers to get a low interest rate on loans such as mortgages and construction borrowing. Today, the interest rate on a 30 year fixed mortgage rate is around 3.75 percent. This is a historic low for the 30 year mortgage. The Operation Twist program by the Federal Reserve is scheduled to last into the end of June 2012.

Will lowering interest rates further with another quantitative easing program really help the economy? The answer to this question is really open for debate. All of the quantitative easing that the central bank has done has led to inflation and higher stock prices, therefore, another QE-3 could inflate the stock markets and help raise the price of food and energy. Traders in the past will usually be able to telegraph artificial inflation when the price of gold and silver rise.

It is difficult to really see the Federal Reserve implementing another quantitative easing program at this time while they are currently in the middle of the Operation Twist program. In my opinion, the next stimulus program would come later in the year if it does occur. Some leading equities that could trade higher on the back of any quantitative easing announcements include iShares Gold Trust(ETF)(NYSEARCA:IAU), ProShares Ultra Silver (ETF) (NYSEARCA:AGQ), iPath Dow Jones UBS Copper Total Return Sub-Index ETN (NYSEARCA:JJC), and ProShares Ultra DJ-UBS Crude Oil (NYSEARCA:UCO). All of these equities should be kept on the radar by traders if there is a stimulus announcement by the central bank.

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