Gold up $32 as QE3 drumbeat grows louder

Gold scaled the $1,600 an ounce level for the first time in three weeks on Wednesday as investors, worried about cheap money flooding markets and debasing the US dollar, turn to gold as an inflation hedge.

By early afternoon gold was up 2.1% or $32.80 an ounce at $1,613.60 after a flurry of media reports speculating that stronger action by the US Fed to stimulate the economy was imminent.

Spot gold is now back to the level the metal started the year at and up from 2012 lows of $1,535 struck mid-May.

A Wall Street Journal opinion piece (sub required) finds evidence to support the notion that Fed Chairman  Ben Bernanke may hold interest rates at levels near zero until at least mid-2015 through measures which may or may not include a third round of quantitative easing or QE3:

Federal Reserve officials, impatient with the economy's sluggish growth and high unemployment, are moving closer to taking new steps to spur activity and hiring.

Since their June policy meeting, officials have made clear—in interviews, speeches and testimony to Congress—that they find the current state of the economy unacceptable. Many officials appear increasingly inclined to move unless they see evidence soon that activity is picking up on its own.

Amid the recent wave of disappointing economic news, conversation inside the Fed has turned more intensely toward the questions of how and when to move.

 The New York Times also expects a move by the Fed to stimulate the economy saying that "officials increasingly favor expanding the Fed’s holdings of mortgage-backed securities for the first time since 2010".  That is, QE3:

A growing number of Federal Reserve officials have concluded that the central bank needs to expand its stimulus campaign unless the nation’s economy soon shows signs of improvement, including job growth.

The question is expected to dominate the agenda when the Fed’s policy-making committee meets next week, with some members pushing for immediate action while others seek to delay a decision at least until the committee’s next meeting in September, so they can see a few more weeks’ worth of economic data.

Quantitative easing has been a massive boon for gold. The Fed's new near-zero interest rate policy and purchases under QE1 kicked off on 16 December 2008. On 15 December 2008 an ounce of gold cost $837.50.

That's a more than 90% improvement for the precious metal on the back of QE1 and QE2 (first mooted in August 2010) and 'Operation Twist' which started in September and was recently extended until the end of 2012.

Bill Gross, co-CEO of the world's largest asset manager Pimco, said last month he sees a 60% chance of another round of quantitative easing. Gross's bet on QE3 is huge – his holdings of US mortgage debt, the largest percentage of purchases under QE3, make up more than half his $250 billion Total Return fund.