Gold set for rally over next 2 years

Forget what the Mayans told you – it’s time to make some quick investment decisions. And don’t even think about the world coming to an end on December 21, 2012. That’s not going to happen, we tell you – and you tell us if we’re proven wrong!

Back to investments, though.

Gold is set to rally over the next two years, experts believe.

And today, 12/12/12, the 12th day of the 12th month of the 12th year of the century, when the US Federal Open Market Committee (FOMC) will be meeting to discuss their famous quantitative easing programme.

A section of analysts expects the FOMC to increase the $40-billion per month investments that the US Treasury has pledged to make in purchasing mortgage-backed securities – gobbledygook for pumping in additional liquidity in a cash-starved market in an attempt to keep the world’s largest economic engine humming.

But more than that, it’s the looming deadline of Operation Twist – set to expire on December 31 – that will hog the spotlight during the FOMC meet later today.

In a nutshell, the US Federal Reserve sells about $45 billion of short-term Treasuries each month as part of the Operation Twist, and uses the proceeds to buy long-term Treasuries.

Simplistically, that is akin to restructuring your short-term loan into a longer term loan, thus reducing the amount you pay out every month as EMI – but will have to pay it out for a longer duration - kicking the can down the road, if you like.

So, in today’s meet, the Fed probably would opt to extend Operation Twist. And that will definitely add to gold’s sparkle.

“Our baseline expectation is a continuation of the current pace of asset purchases of $85 billion per month on an open-ended basis, which would imply that the current $45 billion per month in [Operation] Twist-financed Treasury purchases is replaced by $45 billion per month in QE-financed Treasury purchases,” Jan Hatzius of Goldman Sachs said of the likely actions at the December 12 FOMC meeting.

With an additional surge in the amount of money being pumped into the market – and for much longer than previously envisaged – gold prices will rally, believe experts.

Goldman Sachs reckons that the slow US recovery will keep the Fed on this $85 billion-a-month money-printing binge for at least two years.

Simple mathematics will tell you that $85bn over 24 months equals $2.04 trillion of additional money making its way into the economy as QE3. And that’s approximately equal to QE1 and QE2 combined.

You remember what QE1 and QE2 did to gold – right? Correct. In the first two years of QE1 and QE2, gold prices rallied by about 60 per cent.

Overall, QE1 and QE2 together pushed up the price of gold from $712.30 per ounce in the final quarter of 2008 (when it really hit the fan) to beyond $1,900 per ounce at one point – it is still hovering above $1,700/oz – but not for long.

According to this just release Bank of America-Merrill Lynch (BoFA-ML) forecast, with $2tn of Fed asset purchases to 2014, gold should rally. “Our analysis suggests that a single month’s purchases of MBS to the tune of $40bn will likely lift gold prices by around 0.7 per cent within the time frame of four months,” the just published report maintains.

“Assuming that these purchases will continue until the end of 2014, this may lift gold prices by a cumulative $360/oz relative to spot, taking quotations to $2,100/oz. If we include additional Treasury purchases of $45bn per month once Operation Twist comes to an end, we see an additional monthly uplift in gold prices of 0.8 per cent,” it adds.

“This combination of open-ended MBS purchases and the possibility of additional Treasury bond purchases after operation Twist could further lift gold prices by adding over $2 trillion to the Fed’s balance sheet over the next two years.”

The report concludes that gold prices could rally to $2,400/oz by 2014. “We have a 6-month target of $2,000/oz, but see scope as well for prices to rise to $2,400/oz by the end of 2014,” the BoFA-ML report maintains.

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