It was a "No surprises" day yesterday - Be it for the gold and silver markets, currency or the stock markets or even the common man who waited eagerly to hear what Bernanke had to say. Bernanke, as usual, said nothing new whiles the Stock market and the US Dollar rose, and gold and silver prices were slammed - Nothing New!
Bernanke, in his prepared remarks said its bond-buying program is "by no means on a preset course." The U.S. dollar index slipped in the wake of the release of the prepared text, which in turn helped to lift gold and silver prices. A bounce in the US Dollar came as the Fed chairman appeared more hawkish in the question-and-answer session of his congressional testimony. Gold and Silver prices got hammered eventually after a volatile session Wednesday, first trading higher when prepared congressional testimony from Federal Reserve Chairman Ben Bernanke was construed dovish. Volatility remained high in almost all market segments. The dollar also kept oscillating during the day while gold prices reacted accordingly. The euro was at $1.3129 a minute ahead of Bernanke's initial testimony, climbed as high as $1.3177, backed off as far as $1.3096 and then recovered again. Gold and Silver futures fell sharply later, (for real reasons unknown), but seemingly when traders concluded he was repeating the "Tapering" stand and not really saying much new after all. Bernanke has repeatedly emphasized that the QE taper hinges solely on the future economic scenario in regards to unemployment rate. He also said if economic conditions deteriorate again the central bank could ramp up its monthly bond-buying program As for Inflation - oh! That is not an issue to worry about at all.
It's only a matter of time before Gold and Silver get slammed when Bernanke speaks:
Bernanke's overall commentary left the Gold and Silver market with the realization that Federal Reserve policymakers are looking to start exiting from quantitative easing when they think the time is right. Comex Gold August contract slumped to $1269.3, but ended the session with a loss of $12.90 to settle at $1,277.50 while the Comex Silver Sep futures closed at $19.42 after hitting an intraday low of $19.23. There were also a few unconfirmed reports of some hedging (by producers worried about obtaining financing for projects) that may have occurred around the $1,300 level in Gold futures. Gold and Silver at psychologically crucial levels may also have lead to some pullbacks. Traders tend to exit positions to capture profits when they are unsure if the market can break through a major chart level or when close to major round numbers. These psychological levels are often targets for traders to capture their profits. In that case, a break above the $1300 level may provide a major breakthrough for Gold & above $20 for Silver. The bottom line is that gold and silver prices keep getting smashed on same grounds repeatedly, even though technically in extreme oversold conditions while the stock markets keep rising (mysteriously) even though technically in extreme overbought conditions. Stock markets rose from the huge collapse in 2008 and have gained momentum solely on the Fed's mega quantitative easing. So now, if the Fed plans to start tapering, should equity markets not be the first to get hit? But no! Stocks should keep on rising. U.S. Stock Markets have never been this overextended at any point in the last 20 years and are undoubtedly in a bubble.
Bernanke continued his stand saying - "I emphasize that, because our asset purchases depend on economic and financial developments, they are by no means on a preset course. On the one hand, if economic conditions were to improve faster than expected, and inflation appeared to be rising decisively back toward our objective, the pace of asset purchases could be reduced somewhat more quickly. On the other hand, if the outlook for employment were to become relatively less favorable, if inflation did not appear to be moving back toward 2%, or if financial conditions - which have tightened recently - were judged to be insufficiently accommodative to allow us to attain our mandated objectives, the current pace of purchases could be maintained for longer."
Bernanke's mixed messages on monetary policy have been stoking volatility in the $4 trillion-a-day currency market. "The market is confused, as Bernanke's message was confusing," said Mark O'Byrne, executive director of Dublin-based GoldCore Ltd. As ever, it is best to watch what central bankers actually do, rather than what they say." Anyways the entire show of U.S. Economic recovery is based only on numbers derived from accounting gimmicks and flawed theories by Bernanke. Realistically thinking, can the Fed really afford to taper or end QE? Apart from the real woes of the US Economy, the European banking and sovereign crisis is back with a vengeance while economic numbers out of China indicate a sharp economic slowdown.
For a better picture on Gold demand, look at borrowing rates. GOFO - Gold forward rates are negative, the first time since it went into solid backwardation on Sept. 29, 1999, when there was "massive speculative borrowing" following the announcement of the Central Bank Gold Agreement which limited gold sales. Also, precious metals should get some support from the start of wage negotiations in the mining sector of South Africa. The mining companies, which have their backs against the wall, in any case on account of the sharply cheap gold prices, are unable to meet such unrealistic demands. Strikes thus appear inevitable.
Additional disclosure: I am long in Silver, Hold some Gold and will add silver on price declines.