Thursday, 13 October 2011

Gold and Silver in upward trend as Bernanke considers more QE

The Federal Reserve released  the minutes of the September 20-21 session in which there is talk of more monetary stimulus.  Fed officials are considering further large scale asset purchases (QE3) as a form of boosting the economy due to “the considerable uncertainty” in the US growth prospects.

The debate was centered around the so-called “Operation Twist” which aims to lower long term interest rates (and hence de cost of capital borrowings) by selling short term maturities and  buying long term bonds. Fed decided to replace (or “twist”) $400 million in short term t-bills, but as Chairman Ben Bernanke argued that it is “a significant step but not a gamechanger”, we may see more quantitative easing in the upcomming months.

A number of participants saw large-scale asset purchases as potentially a more potent tool that should be retained as an option in the event  that further policy action to support a stronger economic recovery was warranted. Some judged that large-scale asset purchases and the resulting expansion of the Federal Reserve’s balance sheet would be more likely to raise inflation and inflation expectations than to stimulate economic activity and argued that such tools should be reserved for circumstances in which the risk of deflation was elevated.
The Fed officials also discussed the state of the US dollar and the global equity markets.  Obviously the only thing keeping equity markets from total collapse is the expectation of further stimulus.
Of course all of this is extremely bullish for commodities and especially for precious metals, because more QE could only mean more inflation, and gold is nowadays the best protection against inflation.  Fundamentals are in place for an upward break-out of  the $1680 resistance level, and now with the bullish triangle forming on the daily chart, the possibility of a move to higher levels ever-increases. The support provided by the daily 200 EMA was tested 3 times now, with only one spike, providing a protection, at least in the short term, against “lower assaults”.
The foreign exchange value of the dollar increased over the intermeeting period, reflecting a flight to safety that also contributed to lower benchmark sovereign yields in Germany, the United Kingdom, and Canada. In contrast, the yield on two-year Greek sovereign bonds rose sharply as market participants became increasingly concerned that Greece might default on its sovereign debt. Equity prices in the euro area decreased over the intermeeting period, following sharp declines in early August. After falling steeply before the August FOMC meeting, emerging market equity prices were little changed, on net, over the period.

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