Gold prices will start another epic run beginning Dec. 12 – the day the Federal Reserve will double down on QE3 at its Federal Open Market Committee (FOMC) meeting.
Decisions made at the Dec. 12 FOMC meeting could add as much as $2.2 trillion to the Fed's balance sheet over the next two years, which will turbocharge gold prices, silver prices and oil prices.
The FOMC is the select group within the Fed that sets monetary policy, such as interest rates and the bond-buying programs known as quantitative easing, or QE.
That the Fed will dramatically increase QE3, which launched in September with the monthly purchase of $40 billion in mortgage-backed securities (MBS), at the Dec. 12 FOMC meeting is almost a given; it practically has no choice.
But the real issue at the Dec. 12 FOMC meeting will be what to do about the Dec. 31 expiration of the Operation Twist program. In Operation Twist, the Fed sells about $45 billion of short-term Treasuries each month and uses the proceeds to buy long-term Treasuries.
The Fed probably would opt to extend Operation Twist – which has not added to the Fed's balance sheet as QE1, QE2 and QE3 have – except that it is starting to run low on short-term securities to sell.
Yet the Fed committed in October to extending its easing policies as long as necessary to bring down unemployment and aid the US economy. Its only option is to convert Operation Twist to a conventional bond-buying program – effectively doubling its QE3 money-printing.
"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 (NYSE: GS) said of the likely actions at the Dec. 12 FOMC meeting.
The Stimulus for Silver Prices & Gold Prices
What matters to gold and silver prices, though, is not just the increased rate of QE3 but the likely duration.
The research team at Goldman Sachs estimated that the slow US recovery will keep the Fed on this $85 billion-a-month money-printing binge for at least two years.
At that point, the tab for QE3 would be $2 trillion, approximately equal to QE1 and QE2 combined.
A team at Bank of America (NYSE: BAC) came to a similar conclusion, although the team put the ultimate total for QE3 slightly higher, at $2.2 trillion. Add that to the existing $2.8 trillion of debt on the Fed's balance sheet, and you get a grand total of $5 trillion.
While such runaway monetization could have dire consequences for the US dollar, it will be jet fuel for both silver prices and gold prices. Gold has recently hovered around $1,700 an ounce, while silver is in the $35 neighborhood.
The Fed's QE programs, which started in January 2009, have helped push gold up 97% in less than four years.
It's no surprise, then, that major banks see gold prices taking off next year after the Fed accelerates QE3.
Deutsche Bank (NYSE: DB) set a target of $2,000 for the first half of 2013, while Bank of America has projected gold prices at $2,400 by the end of 2014.
The Website ZeroHedge foresees an even greater impact from the QE3 that the FOMC meeting will unleash: gold at $3,350 by early 2015 and oil at $190 a barrel.
Looking a bit further ahead, Money Morning Global Resources Specialist Peter Krauth said the massive dose of QE3 could, by late 2016, have us "looking at $3,700 gold -- and silver may be trading at $95."
And there may be no end in sight.
"I expect lots more money printing, whose inflationary effect is always kind to silver and gold. My long-term target for gold still remains $5,000," Krauth said. "As this bull progresses, I think we'll see the gold/silver ratio move down closer to 20, which would imply that silver eventually reaches $250."
Making the Dec. 12 FOMC Meeting Pay Off
Best of all for gold, the Federal Reserve's profligate money-printing is typical of central banks around the world, undermining fiat currencies everywhere. And the less valuable fiat currencies become, the more gold, silver and oil prices will rise.
Because it's not always easy for retail investors to buy commodities like gold and silver directly, those seeking to profit from the QE3 bonanza spawned by the Dec. 12 FOMC meeting need to look at mining stocks and exchange-traded funds (ETFs).
David Zeiler is associate editor of Money Morning.