Gold bullion prices will climb if central banks across the world keep monetary policies loose, but stocks in companies that mine gold, which tend to lag behind the price of the metal, are poised for a major leap forward, says David Skarica, editor of The Gold Stock Adviser newsletter and author of "The Great Super Cycle."
To spur recovery, the Federal Reserve, the European Central Bank and their Asian counterparts have cut interest rates and resorted to measures including bond buybacks from banks, the latter being a tool known as quantitative easing (QE) that floods an economy full of liquidity to push down interest rates and encourage investment and hiring.
As a side effect to such stimulus, paper currencies weaken and gold strengthens.
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Gold is taking a breather right now after soaring to a record $1,923.70 in September of last year, mainly as European fears have sent investors snapping up positions in gold's traditional hedge, the dollar as a safety play.
But if high unemployment rates threaten to climb higher, the Federal Reserve will juice the U.S. economy anew via quantitative easing and send gold climbing.
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"I think there will be a QE3," Skarica tells Newsmax.TV in an exclusive interview, referring to a third round of quantitative easing.
A first round saw the Fed buy $1.7 trillion in mortgage-backed securities from banks while a second round saw the Fed snap up $600 billion in Treasurys.
Expect a third round to involve a return to purchasing mortgage-backed securities from banks, as interest rates are already at rock-bottom levels on U.S. debt, and making them lower won't do very much.
"I think it will be mortgage-backed securities or something else. Just buying government debt when the yield is only 1.5 percent on the 10-year bond makes very little difference because let's say it goes to 1.3 percent. How stimulative is that, really?
Such a policy would make gold attractive, but keep an eye on mining firms as well.
Though they tend to lag behind the metal, and the wait may be a little agonizing, the returns are often worth it.
“If you look at historically, we’re back at 2008 levels in the gold and gold mining companies," Skarica says.
"After that gold stocks doubled in the next year. So when the gold stocks lag like this, they’re really, really getting cheap when compared to the price of gold, and I think they’re really going to outperform when that turn finally comes. Maybe some form of QE or some form of stimulus is going to be what it takes for that turn to come.”
In other words, gold stocks are on sale now, but the offer won't last.
“I would say they’re 30-40 percent cheaper than historically average.”
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Meanwhile, quantitative easing, often referred to as money printing, will return, though don't expect it to send assets like gold and stocks rising as much as the past two rounds, as monetary policy tools tend to produce diminishing returns.
At the end of the day, the Federal Reserve can do very little to help tackle the country's fundamental problem of too much debt and sluggish growth.
"People, I think, are going to wake up and smell the coffee, and really realize this money printing hasn’t made the economy any better. We still have 8 percent unemployment — real unemployment rate of 16 percent, or as they say, underemployment," Skarica says.
"I think you might just see more kind of a stagflationary environment where people put money with that money printed into hard assets because they realize it’s not really improving the economy. It’s more just creating inflation."
The Fed officially remains poised to act should the economy weaken further, though has stopped short of making specific plans to intervene and juice the economy with a shot of fresh liquidity.
"Reflecting its concerns about the slow pace of progress in reducing unemployment and the downside risks to the economic outlook, the Committee made clear at its June meeting that it is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability," Fed Chairman Ben Bernanke told the Senate Banking Committee Tuesday.
About David Skarica David Skarica is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He also writes the Gold Stock Adviser. Discover more by Clicking Here Now.
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