A Dovish Bernanke Saves Gold And Silver, For Now

Includes: GDX, GLD, GS, SLV
by: Quad 7 Capital

As we all know, gold and silver have been under a lot of selling pressure lately. The pressure was so intense, it has caused a lot of institutions to slash price targets, most recently with Goldman Sachs cutting its gold target to $1600. Today the recent selling trend changed, for now. Federal Reserve Chairman Ben Bernanke vehemently defended the U.S. central bank's bond buying at his testimony before Congress today, arguing that its benefits exceed possible costs or consequences of these actions. Bernanke said policymakers are clearly aware of the long-term potential risks from their easy money policies to bolster the economy, such as the ability to sell holdings off its balance sheet and transition out of the stimulus successfully. The other prominent risk is the potential long-term effect of sustained low interest rates on markets, and the effect of rising these rates in the future. Bernanke was adamant that the Fed would be able to cease its monetary support in a timely and orderly fashion without causing economic calamity. Instead, Bernanke warned the biggest risk to the economy and the markets is from the looming sequestration (the automatic spending cuts set to go into effect next week). Coupled with the rise in taxes at the beginning of this year, Bernanke cited that this would most certainly be a negative catalyst for the economic recovery.

In a prior article I cited that the FOMC Minutes of the Fed's January 29th-30th policy meeting had some very hawkish statements. The minutes indicated that a number of Fed officials believed the long-term risks of buying bonds and expanding the Fed balance sheet were so great that it may be wise slow the stimulus program, or end it all together, before economic targets were met (namely unemployment rates). This caused some additional selling in an already technically vulnerable gold and silver market. In fact, the SPDR Gold Trust (NYSEARCA:GLD) and iShares Silver Trust (NYSEARCA:SLV) fell to lows not seen since the summer of 2012 following the release of the minutes. In these minutes however, other officials argued there was a danger in halting the stimulus prematurely.

This latter attitude was embraced by Fed chairman Bernanke. His testimony today indicated that stimulus would continue as planned and not cease prematurely. This bolstered the precious metals markets, sending gold up $21.80 and silver up $0.21, to $1608.40 and $29.20 respectively, at the time of this writing. This price action reversed an earlier selloff in silver and a nearly flat gold market in early trading. The gold and silver miners, which had bounced up and down before the testimony, have shot up from their lows of the day. The Gold Miners Index (NYSEARCA:GDX) is up $0.72 to $39.29, and is has risen nearly 3% from its low today of $38.14. The GLD is up $1.96 to $156.30 and the SLV is up $0.30 to $28.37. Traders who bought the recent dip in the metals looking for a corrective bounce could consider booking a quick profit at current levels. Those bearish on gold and silver should consider covering here and then looking to re-establish their short at higher prices. I am bullish on the metals and miners long-term, and thus have added to my physical holdings and holdings in the miners on these dips. I do not plan to sell on this bounce.

In summation, gold and silver have caught a boost from a dovish Bernanke. This is likely sparking some short covering which is compounding the buying we are seeing in the metals today. One thing that may keep a lid on prices, besides the technical resistance levels, is the fact that Bernanke noted inflation remains projected to stay at or below the Fed's 2% target for the foreseeable future. I believe that this is temporary and there will be greater inflation in the coming years from this continued monetary easing, which will further bolster the prices of gold and silver long-term. For now, Bernanke has temporarily saved gold and silver prices as well as given a boost to the miners. At the same time, the Dow and S&P 500 are being sold down from their highs of the morning on the news. The next catalyst to watch is the discussion surrounding the pending sequestration and any decisions made regarding this important and potentially market moving event.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.