Tags: Fuljenz | QE3 | gold | Dow

Mike Fuljenz: Is QE3 Really QE4-Ever?

Wednesday, 31 Oct 2012 08:30 AM

By Mike Fuljenz

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The Federal Reserve Board announced its third round of quantitative easing (QE3) at the Federal Open Market Committee (FOMC) meeting in September.

This inflationary move helped send the price of gold up, but the price of gold has fallen, partly on the suspicion that GOP presidential nominee Mitt Romney will win the election and “fire” Fed Chairman Ben Bernanke and his wimpy FOMC “doves,” who keep voting for cheap money — and LOTS of it!

The most amazing series of quotes in the minutes from that FOMC meeting profiled the Fed’s admission that the economy is expanding at a “moderate” pace, with household spending growing “a bit more quickly.”

In other words, we don’t face an official recession, but the Fed still voted to buy an extra $40 billion of Treasury bonds each month, while also announcing that it will keep short-term interest rates near zero for another three years, through at least mid-2015. To many observers, this isn’t really QE3, but rather QE4-Ever, an ever-expanding supply of fiat money seemingly “forever.”

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

The Fed will likely continue QE3 indefinitely, since the FOMC is “concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions,” and that “the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.”

In brief, look for a rally in gold if President Barack Obama is re-elected and Bernanke enjoys four more years of job security.

If Romney wins, gold might take a temporary dip, but as soon as investors realize that a new President Romney might not REALLY fire Bernanke and we remain in a recession, we could see a delayed rise in gold under a Republican President and a compliant Republican Congress.

Will the Dow and Gold ever “Cross” Again?

On one day in January of 1980, the Dow Jones Industrial Average and the price of gold met at about 850 Dow and $850 gold. This “crossing” of the Dow and gold has never happened again, before or since, but the ratio has undergone three major cycles of extreme highs and lows in the last century.

When gold was $20.67, the Dow reached a peak of 389 in 1929 for a 19:1 ratio. The ratio fell down to 2:1 in 1932, when the Dow bottomed at 40 and gold was $20.67.

The next peak came in 1966, when the Dow reached 995, while gold was $35, for a ratio of 28:1. Then came the 1980 “crossing,” followed by the greatest gold discount in the last century, in late 1999, when the Dow was 11,000 and gold was $252, for a 43:1 ratio. The recent ratio is 7.7:1 (13,100 Dow vs. $1,712 gold).

Here are the extreme ratios of the last three cycles and where we may be headed next:


Year
Dow Gold Ratio
1929 389 $20.67 18.8
1932 40 $20.67 1.9
1966 995 $35 28.4
1980 850 $850 1.0
1999 11,000 $252 43.7
2012 13,100 $1,712 7.7

Gold’s peak in Dow terms came during two election years that were major “game changers”: the 1932 election of Franklin Roosevelt over the failed Republican Herbert Hoover, and the 1980 election of Ronald Reagan over the failed Democrat Jimmy Carter.

In that context, this election does not constitute an economic low point, similar to 1932 or 1980, but we might be historically “on the way” to such a convergence, and that could be the best time to buy gold.

If gold and the Dow ever cross again, it would likely fall somewhere between $2,000 and $10,000.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

Take your guess, but the Dow fell to 6,500 in 2009, so that is a possible target in another severe financial crisis. Perhaps gold and the Dow will meet at $6,500, for a 50 percent decline in the Dow and a 280 percent gain in gold.

Even if we reach the 2:1 ratio of 1932, we could see $5,000 gold and a 10,000 Dow by 2016, most likely if Obama wins in 2012, but possibly no matter who wins — as long as the Fed gives us QE4-Ever.

About the Author:
Mike Fuljenz
Mike Fuljenz is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of the NLG award winning Michael Fuljenz Metals Market Weekly Report. Discover more by Clicking Here Now.

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