Daily Gold Update

Source: American Gold Exchange

Austin— Gold jumped another 1.6% and silver 1.9% today, extending yesterday's breakout on the Fed's pledge to keep interest rates near zero until late 2014. For the first time, the Fed also set an explicit inflation target�2%, which is slightly higher than its implicit historical target of 1.5% to 2%. This new target may be read as relatively lenient toward inflation, and is fueling demand for gold and silver as longer-term inflation hedges.

At the Comex close: February gold gained $26.60 to $1,726.70; March silver jumped 62 cents to $33.74; April platinum soared $37.20 to $1,616.80; and March palladium added $1.10 to $694.45 an ounce.

Adding to demand for precious metals is the likelihood that a third round of quantitative easing will be announced sometime this spring, perhaps as early as the FOMC meeting on March 13. In a news conference yesterday, Chairman Bernanke all but declared as much, saying the FOMC "is prepared to provide further monetary accommodation" and additional bond buying is "an option that is certainly on the table." QE3 would almost certainly be very good for gold. Following the Fed's QE1 announcement on November 25, 2008, spot gold gained 17% within six months (from $820 to $960) and 44% within a year (to $1,180). Following the QE2 announcement on November 3, 2010, spot gold gained 14% within six months (from $1,345 to $1,540) and 32% within a year (to $1,780).

Based on analyses of the relative balance sheets of the Fed and ECB, and acceptable euro/dollar ratios, Zero Hedge projects QE3 to be the neighborhood of $750 billion in Mortgage-Backed Securities. Morgan Stanley predicted a similar figure back on January 5. When you consider that this amount easily exceeds both QE1 ($500 billion in MBS) and QE2 ($600 billion in MBS), projections of a gold price from $2,000 to $2,500 this year, like those we've recently cited from GFMS, UBS, and Morgan Stanley, seem eminently reasonable if not conservative.