Quantitative easing is not fully priced into gold ETFs but an external trigger is needed for further gains. If history is a guide, we should see further price upside for precious metals following last month’s announcement of a third round of quantitative easing (QE3) by the Fed.

Six months after the initial announcements of previous rounds of quantitative easing, the gold price rose on average by 12% and the silver price by 33%. Since the announcement of QE3, physical gold has risen only 2.3% and physical silver only 2.6%.

The likely next trigger for precious metals to move higher is a formal request by Spain for a bailout. This would open the way for the ECB to buy Spanish sovereign bonds in the secondary market on a potentially “unlimited” basis, making investors think twice before shorting Spanish bonds and taking immediate pressure off peripheral European sovereign markets.

It also would likely improve depositor confidence in Spanish banks and help reduce capital flight. Such developments would likely benefit the Euro (weaken the US dollar) and boost risk appetite.

Precious metals, particularly the higher beta “white” metals, will likely perform well under such a scenario. In the meantime, since it is difficult to predict when Spain will ask for a bailout, markets remain on edge – particularly as net speculative futures longs are looking stretched for some of the metals and prone to short-term correction.

Therefore, while the latest QE appears not to have been fully priced in, an external trigger, such as a Spain bailout request may be necessary to driven the next leg of the bull market.

South African gold supply constraints keep prices high

South African gold miners rejected the industry’s latest wage offer last Thursday, prolonging strike action and constraining gold supply from one of the world’s largest producing countries.