The publication of FED's minutes has made the markets to rush up. It is some surprising why this happened, as there has always been clear that QE3 will happen. I.e. the markets had to be prepared for every new information on it and not be surprised and ultra motivated.

But markets are not rational. Otherwise for more clever investors there would not be a chance to make money. The new QE3 promise was not surprising for some investors, they waited for it and had bought Gold at super attractive levels below $1600. Now profits are good.

Why the FED news was predictable? The answer is very simple - because of the end of year coming. What will happen at the end of the year? The ceiling of US debt will be raised again. Another flow of money will be needed to buy new government bonds to finance the gigantic US budget deficit. Some of this money will come from banks that will take loans from FED at almost 0% interest and give it to the government at 1-2%. But this will not be enough. FED will have to buy bonds directly, as up to now it has become a buyer of 70% of US debt.

So to do this FED must start the QE3. The excuse will be the need to stimulate the economy. The real reason is the lack of real buyers of US bonds and the need someone to buy these bonds. Otherwise the United States will go bankrupt.

In fact the real name of QE3 must be QE4. Going at the moment "twist" operation is de facto a QE. I.e. it is number 3. But the names have no big importance. The reality is that in US politics nothing changes and this requires more and more money-print rounds.

FED postponed for some time the announcement of QE3 in an attempt to limit the inflation pressure by using propaganda tools. But with postponing the announcement, the probability to announce it with every next moment increases. The QE3 must be announced, because the government needs money. I.e. with less time remaining the probability to announce increases. I.e. it becomes more and more profitable to stay long with Gold and wait guaranteed profits. But only for clever investors. Not so clever ones are surprised and thanks to them the markets skyrocket to bring profits to the clever.

Generally if this type of policy continues, it will not be a surprise if we see $2000 per ounce level passed before the end of the year.

Dobri
August 23th 2012