Gold Buying Will Resume: Opinion

NEW YORK ( TheGoldAndOilGuy.com) -- A leading precious metals consultancy, Thomson Reuters GFMS, has forecast that investors will buy record amounts of gold in the remainder of 2012.

GFMS produces the benchmark supply and demand statistics for the gold market. It forecasts that investors will purchase 973 tons of gold in the second half of 2012, more than during the wild gold market of the summer of 2011.

This surge in demand for the yellow metal, GFMS says, will move gold above the $1,850-an-ounce level, not far from the record high of $1,920 hit in September 2011.

GFMS may be right. This past week, gold hit its high for this year at $1,790 an ounce on the back of the various global stimulus plans launched by a number of countries around the globe.

Primary among the recently announced stimulus plans was the Federal Reserve's QE3 or as some in the market have called it, "QE Infinity." Philip Klapwijk of GFMS said that, for the gold market, "QE3 has become talismanic."

The Federal Reserve said it would purchase $40 billion a month in mortgage-backed securities indefinitely. In addition, the Fed will continue Operation Twist -- the buying of longer-dated Treasury notes and bonds. When all is totaled, the market is looking at about $85 billion a month in government bond purchases for an unlimited period of time.

The main characteristic of QE3 that drives the gold market is the fact that the open-ended purchases of all of these Treasuries will be financed by money that does not yet exist!

And it's not just about a fear of future inflation being ignited by all this money creation. It's a very logical move higher by gold based on recent history of Fed actions and gold prices.

Even ignoring Operation Twist, the Fed will add $40 billion a month, or $480 billion a year, to its balance sheet. If one looks at the Fed's own Web site, you will see that it shows current assets of $2.8 trillion. Add $480 billion annually to that and in about five years, the Fed's assets (the foundation of the money supply) will have nearly doubled.

That is exactly what happened in the last five years too -- the Fed's assets doubled. And in what should not be a surprise to gold investors, the price of gold also doubled! For the past decade or so, gold has tracked the increase in Federal Reserve's assets. Do not be shocked if that pattern continues over the next five or 10 years.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

Chris Vermeulen is founder of the popular trading sites www.thegoldandoilguy.com and www.ActiveTradingPartners.com. There he shares his highly successful, low-risk trading method. Since 2001, Chris has been a leader in teaching others to skillfully trade in gold, silver, oil and stocks in both bull and bear markets.

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