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Catching a Falling Financial Knife

QE3 Removes Price Ceiling for Gold and Silver

Commodities / Gold and Silver 2012 Sep 15, 2012 - 05:18 AM GMT

By: Eric_McWhinnie

Commodities

Peter Schiff, chief executive officer of Euro Pacific Capital, recently gave an interview discussing the prospects of gold. When asked how high the price of gold may reach, he responded that there is no ceiling for the precious metal, because there is no limit on how much money will be printed. The Federal Reserve’s latest announcement confirms this theory, and paves the way for much higher gold and silver prices.


On Thursday, the central bank proved it is willing to do whatever it takes to prop up asset prices in an effort to cause a wealth effect among consumers and spur a recovery. The Federal Open Market Committee launched yet another quantitative easing program. This time, the Federal Reserve will buy agency mortgage-backed securities at a pace of $40 billion per month, in addition to its current Operation Twist 2 program. The net effect of these actions will increase the Federal Reserve’s long-term holdings by about $85 billion each month through the end of the year. Furthermore, the central bank extended out its zero interest rate policy to at least mid-2015.

Interestingly, QE3 will be open-ended, meaning that the Federal Reserve has no set limit to how long the fresh money printing will last. It will also conduct additional asset purchases if the labor market does not improve. In a press conference following the statement, Fed Chairman Ben Bernanke explained, “We’re looking for ongoing, sustained improvement in the labor market. There’s not a specific number we have in mind. What we’ve seen in the last six months isn’t it.” The headline unemployment rate in the U.S. has remained above 8 percent for 43 consecutive months.

While the announcement of the first open-ended program in the Federal Reserve’s history was rough enough on the U.S. dollar, the central bank explained it will keep its finger on the print button until well after an economic recovery takes place. “To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens,” according to the FOMC statement. Bernanke later added, “We’re not going to rush to begin to tighten policy.”

A Bernanke led Federal Reserve has been very kind to precious metals. Since the Chairman was appointed in early 2006, the price of gold has increased from $570 an ounce to more than $1,700 an ounce. In the same period, the price of silver has surged from $9.70 an ounce to over $34 an ounce. After QE3 was announced, both precious metals outperformed as expected. Gold quickly increased $38, while silver jumped more than $1. Meanwhile, the U.S. dollar index, which compares the greenback in a basket against six other fiat currencies, fell to 79.25 and reached its lowest level against the euro since May. On Friday, the dollar continued its decline.

In the press conference following the print-to-infinity-and-beyond announcement, Bernanke also said, “We can’t solve this problem by ourselves.” However, who is the Chairman hinting to for help, the government? The country’s two political parties appear to be unable to agree on anything these days, and their most recent accomplishment involves pushing the official national debt right through $16 trillion. With more dollar devaluation on the way and gridlock in Washington, gold and silver prices look set to rise even more. At this point, the sky really is the limit.

For more analysis on our support levels and ranges for gold and silver, consider a free 14-day trial to our acclaimed Gold & Silver Investment Newsletter.

By Eric_McWhinnie

http://wallstcheatsheet.com

Wall St. Cheat Sheet : Only days after the S&P 500 crashed to the depths of hell at 666, the Hoffman brothers launched Wall St. Cheat Sheet: one of the fastest growing financial media sites on the web. Like a samurai, our mission is to cut through the bull and bear shit with extraordinary insights, a fresh voice, and razor-sharp wit. We provide the highest quality education and information for active investors, financial professionals, and entrepreneurs.

© 2012 Copyright Eric McWhinnie - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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Catching a Falling Financial Knife