2012, like 2004 and 2008, ALWAYS was going to be a relatively modest year for gold and silver. Modest, that is, within the context of a run rate of a 17% year-on-year increase (compounded) that we have seen for 12 years. Up until "QE Infinity" gold had scored a 4% gain YTD and today it stands at just 9%.
The thing that links 2012 with 2004 and 2008 is of course that these are US election years and not untypically the incumbent is wont to remind us how well the U.S. is doing — by extension the dollar is firmer and gold weaker than it might have been.
With the US balance sheet already at a staggering $3.0 trillion we should expect this to rise by $0.5 trillion a year until the economy improves and it has been suggested, unemployment falls to 5.5%. This is expected to take, at best 5 to 6 years. In short, expect the Fed balance sheet, which has already grown nearly fourfold from pre-crisis levels, to double again.
If gold is to maintain its run rate — and why wouldn't it — and if prices were to correlate with the size of the US monetary base, this would suggest that the gold price rally is also only roughly half way there (arguably it would outperform as confidence in the U.S. dollar evaporates). In other words, gold has the capacity to rise to between $3,500 and $4,000 — something we have maintained for some time. Furthermore, this level would see the Dow/gold ratio marking a fall to 2.5:1 as we also forecast.
Central to Fed policy is the question as to whether or not additional QE will lead to jobs growth? Particularly given that the Fed is flush with cash lying fallow from private and corporate owners who are reluctant to commit it to the markets because of a pervading sense of uncertainty. More QE could, it may be argued, simply be making matters worse. The biggest crisis in our view is less of under-employed people than under-employed money (or investment fuel). Some have coined QE3 as "QE Infinity" on the basis that the Fed will be purchasing $40 bn/month in MBS for perpetuity — bringing to mind that line from Buzz Lightyear "To infinity and beyond" — others might reflect on the latest policy move and call it "to insanity and beyond."
In the meantime, gold looks rosey and we maintain a bullish outlook — with the best for prices yet to come.