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Chart Of The Week: Gold And An Ever-Growing Balance Sheet

 November 08, 2012 03:27 PM


While Americans were still submitting their ballots, gold rallied on the possibility of a President Barack Obama reelection. With presidential results confirmed, it appears that Ben Bernanke's job of hovering over the economy and dropping parachutes of money out of his helicopter is secure.

"Gold could not have asked for a better outcome," with a second term for Obama, a Democratic Senate and Republican House, says UBS Investment Research. As the research firm explains in its morning note, "the high likelihood of political gridlock up ahead as attention now turns to the fiscal cliff and the debt ceiling certainly presents upside opportunities for gold."

UBS says the gold market isn't even pricing in the outcome of the next Federal Open Market Committee meeting in December when the "conclusion of Operation Twist will morph into further quantitative easing."

[Related -Gold: The Ultimate Store of Value?]

Our chart of the week shows the substantial impact of the Federal Reserve's decision. In a weekly report, Robert Perli of International Strategy and Investment (ISI) projected the enormous growth of the U.S. balance sheet if quantitative easing continues over the next few years.

Currently the Fed is buying mortgage-backed securities at a rate of $40 billion each month. The dashed orange line assumes that if this $40 billion per month continues over the next few years, America's balance sheet expands to about $4.5 trillion by the end of 2016.

However, the $40 billion was on top of the previous spending spree on Treasury securities. Added together, this means that Ben Bernanke is forking over $85 billion per month through the end of 2013, which "makes a provocative picture," says Perli. You can see below that if this open-ended spending continues through the end of 2016, the U.S. balance sheet swells to nearly $7 trillion!

[Related -Why Gold Is Undervalued]

In his October 1 speech in Indiana, Bernanke explains his reasoning behind the Fed's buying spree:

"We expect these purchases to put further downward pressure on longer-term interest rates, including mortgage rates. To underline the Federal Reserve's commitment to fostering a sustainable economic recovery, we said that we would continue securities purchases and employ other policy tools until the outlook for the job market improves substantially in a context of price stability."

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