Merrill Lynch says Gold to Glitter All the Way to $2,400

Francisco Blanch of Merrill Lynch said that gold is heading toward $2,400 an ounce by the end of 2014. The combination of MBS purchases and possibility of additional Treasury bond purchases could lift gold prices by adding over $2 trillion to the Fed's balance sheet.

By Greg Jensen
Posted 9/19/2012
NASDAQ

Francisco Blanch of Merrill Lynch says gold is headed to $2,400 an ounce by the end of 2014. In his research report to clients titled “Gold Under QE-Infiniti,” the analyst wrote, “The combination of open-ended MBS purchases and the possibility of additional Treasury bond purchases starting in December could further lift gold prices by adding over $2 trillion to the Fed’s balance sheet over the next two years.”

Just to review, last week the Federal Reserve launched QE3 and extended the central bank’s next to zero interest rate policy through mid-2015, at the earliest. The combination of $40 billion a month for QE3 and taking Operation Twist to the end of 2012 means the fed will purchase $85 billion a month in securities for the rest of the year.

Chairman Bernanke and the board voted to keep QE-Infiniti in place until max-employment is achieved or inflation is out of control – whichever comes first. It looks like Merrill’s Francisco expects the inflation hedge, gold, to hit the finish line tape first.

Looking back at QE1 and 2 you can see how Atomic Number 79 performed following previous digital dollar printing sessions.

The first U.S. quantitative easing was announced in late November 2008. At the time, gold was trading for roughly $700 an ounce. One year later, the yellow metal was bouncing around $1,400 an oz. By the time QE2 was announced in November 2010, gold bugs lifted the object of their affection to $1,700. In the nine month’s following the Fed’s second session of Ctrl-P, gold peaked at $1,900ish.

Clearly, QE1 packed a bigger punch than QE2. So, gold’s price sensitivity has been reduced easing-to-easing. However, and we hesitantly type these words, it might be different this time. As Blanch mentioned in his notes to clients, QE3 comes without an expiration date, and the European Central Bank’s Mario Draghi says the ECB is about to embark on a similar buying spree.

Investors might think about building an Ark and grabbing two of each as an unprecedented flood money is about to rain down. Many feel the deluge of dollars and euros is likely to be inflationary and drive commodity prices, such as gold, much higher.

How high is anybody’s guess? Francisco Blanch puts his two-year target at $2,400, or roughly 18% a year and closer to QE2’s performance than QE1’s. With inflation running hot already, as evidenced by August’s Producer Price Index gain of 1.7%, and employment a long way from hitting Ben’s definition of max, it wouldn’t be surprising to see AU surpass $2,400 in the next 24 months.

At OptionsANIMAL we teach investors how to take advantage of situations like these to boost their portfolio. For example, investors could consider a gold ETF such as iShares Gold Trust (IAU), owning gold outright, or gold futures as possible ways to profit if Francisco Blanch made the correct call.

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