The big question for investors is whether the bull run can continue. If the Fed keeps printing money, there's a very good chance it will.
QE3, which involves the purchase of $40 billion a month worth of mortgage-backed securities, is just part of Washington's pump-priming. Operation Twist is still going on - it's the plan under which the Fed buys longer-term Treasuries and simultaneously sells some of its short-term holdings in order to bring down long-term interest rates. Phase one, in the first half of the year, involved the shifting of $400 billion in assets. The current phase, which runs to the end of December, will deploy another $267 billion.
Plus, the Fed is continuing its policy of reinvesting the proceeds from maturing bonds. The total amount of stimulus in these three initiatives is estimated at $85 billion a month or about $1 trillion a year.
The result of all this new cash flooding the market should be devaluation of the U.S. dollar. The main reason we have not seen that to any great extent recently is the weakness of the euro and the inflow of foreign money seeking a safe haven in U.S. Treasury bonds.
Gold, which is priced in U.S. dollars, has responded by moving higher but there is still a significant amount of upside potential from here. The U.S. isn't alone in quantitative easing - we're seeing it in Japan, China, and Europe as well which means all the major currencies are gradually being debased. Nick Barisheff, the head of Bullion Management Group and one of the country's leading experts on precious metals, describes quantitative easing as a "stealth tax" that will have the effect of reducing the purchasing power of paper money.
There are other factors at work that should add upward impetus to the gold price. First, unrest in South Africa's mines is having an impact on production from that key country. Second, the Bank for International Settlements (BIS) has proposed making gold a Tier 1 asset for commercial banks as part of Basel III. If approved, it would mean banks could value their gold holdings at 100% for purposes of calculating reserves. This would encourage them to add to their holdings of the metal. Third, central banks are increasing their gold purchases. China alone is buying about 500 tonnes a year, which is about 20% of total world production.
Mr. Barisheff says the bottom line could be a return to gold's all-time high of US$1,900 an ounce within the next few months and a break-out to the US$2,500 to US$3,000 range by the end of 2013.
But he notes that if this scenario unfolds, silver is likely to do even better in terms of percentage gains. "Historically, when you have a bull market in gold, silver tends to outperform it," he says. "Conversely, when gold is declining silver and platinum both tend to underperform as their pricing reverts to their industrial value."
He suggests the results of the upcoming U.S. presidential election could have a significant effect on the gold price. "If Mitt Romney is elected it could be negative for gold because he actually might do something about the U.S. deficit," Mr. Barisheff says. "However, in the end he might end up facing exactly the same problems as President Obama when it comes to achieving any meaningful results."
What this all boils down to is that the macro outlook for gold continues to be good. If Mr. Romney is elected it could result in a temporary setback for the metal but over the long term it is still a smart move to hold some in your portfolio.