Gold and the QE3 Ship: Are Both About to Sail?


"With the ISM manufacturing index turning down and the GDP report rolling over, a QE3 ship horn is likely to sound soon."

Back in Mid-May of this year, we had a big rally in the dollar and gold was correcting hard. There was a bit of dollar Bull hysteria at the time, which I felt was quite unfounded. I wrote an article entitled, "The Dollar Bull Monkey Dance Will Soon End Badly, QE3 Next??" You see, the collective herd psychology at that time, just a short ten weeks ago, was that gold would drop hard at the end of QE2 and the dollar would of course rally as high as 82, maybe more against the weighted index.

The dollar has dropped hard since mid-May, as I expected, and gold has continued to rally as well. I had forecasted $1,627 for gold back when we were under $1,500 and last Friday we closed at $1,627 on the nose! During mid-May, most disagreed with my QE3 forecast, and probably still do, but I think the ship is soon leaving port. This could blast gold up to a target of $1,805 on the high end and certainly into the low-1700s to the $1,730 per ounce range.

Gold has had a powerful five-wave rally (Elliott Wave Theory) since the October 2008 lows of $681 per ounce, and certainly one could argue that a correction would make sense fairly soon. However, the fundamentals for gold are only getting stronger as we have inflation climbing at an 8%9% real rate and interest rates continuing to drop. This is creating a "negative" real interest rate environment amidst a continuing weaker U.S. dollar. Hence, it is hard fundamentally to argue against gold at this time, creating difficulty in forecasting the intermediate highs and lows.

With that said, assuming QE3 or some form takes place soon, then my $1,805 target is quite likely to be hit before we can look for any meaningful correction in the precious metal complex. With the ISM manufacturing index turning down sharply as reported this morning and other economic indicators and GDP report rolling over, a QE3 ship horn is likely to sound soon. Below is my latest chart dated July 22nd, with gold at $1,599 at the time, outlining the likely interim moves in gold using my crowd behavioral methodology that I employ at my forecasting service.

Gold, Investing, David Banister

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