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News that Moves: To QE3 or Not to QE3 That is the Question; Precious Metals Outlook

Apr. 07, 2011 2:34 PM ET
Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

 Reducing the Noise: Liquidity and QE3 debate drive markets; the rest of the news cycle is just, as Bernanke would say, ‘transitory’

Bernanke Says Fed Will Act If Inflation More Than ‘Transitory’

Federal Reserve Chairman Ben S. Bernanke said he expects an increase in commodity prices to create a “transitory” boost in U.S. inflation and that the central bank would act if he’s proven incorrect.

“So long as inflation expectations remain stable and well anchored” and commodity-price increases slow, as he’s forecasting, then “the increase in inflation will be transitory,” Bernanke said today in response to audience questions after a speech in Stone Mountain, Georgia.

We have been writing consistently on this blog that ‘bad’ economic news is actually ‘good’ news for the markets. We will pass the baton on to Zero Hedge for a minute as Carpal Tunnel sets in….

QE3 On – QE3 Off: Bizarro World Wins, As Hatzius Threatens Lowering Forward GDP


We have now gotten to the very limits of the market, where any even modestly bad news (Services ISM) even if of a secondary importance nature, sends the market surging higher as expectations that QE3 is inevitable, hit 100%. Then when good news comes, and QE3 is deemed to be impossible, the market plunges. Bizarro world, where bad news is good news and vice versa, has won. Thank you central planning. And for all those who jettisoned gold on expectations the economy was actually, chuckle, improving, here is your chart.

March FOMC Minutes: No Need To Taper QE2, GDP Outlook Revised Lower

Key Highlights:

  • GDP revised modestly lower from January meeting on surging commodity prices
  • FOMC sees stronger recovery, higher inflation
  • Fed officials divided over tighter policy
  • Almost all Fed officials saw no need to taper QE2 buying

On inflation: “Sizable increases in prices of crude oil and other commodities pushed up headline inflation, but measures of  underlying inflation were subdued and longer-run inflation expectations remained stable.”

“The staff revised up its projection for consumer price inflation in the near term, largely because of the recent increases in the prices of energy and food. However, in light of the projected persistence of slack in labor and product markets and the anticipated stability in longterm inflation expectations, the increase in inflation was expected to be mostly transitory if oil and other commodity prices did not rise significantly further. As a result, the forecast for consumer price inflation over the medium run was little changed relative to that prepared for the January meeting.”

…And of course where would we be without a Gold and Silver update? The Fed has provided 83% of the Treasury’s cash since QE2 started and the US$ continues to make new lows. Just a coincidence? We doubt it. Meanwhile, an imminent collapse appears to be approaching the US Treasury bond market. In a world such as this precious metals continue to provide the best portfolio protection….

Surging Oil and Deepening Inflation – Gold & Silver Rise to Record Nominal Highs at $1,459 and $39.50

In trading in London this morning, gold reached a new record nominal high ($1,459.07) and silver a new 31 year nominal high ($39.50) as investors bought the precious metals to hedge deepening sovereign debt risk (in the EU but also in the US with the threat of a federal budget shutdown), geopolitical risk and deepening inflation….

… Anemic economic growth, extremely loose monetary policies, sovereign debt risk, geopolitical risk and surging oil and commodity prices is a recipe for stagflation which would see the precious metals replicate their performance of the 1970’s when gold rose 24 times in value (from $35 to $850) and silver by over 32 times (from $1.55 to $50).


Silver over $100/oz is not as outlandish as once thought with dealers in Hong Kong mooting that possibility.  Strong demand for silver is being seen in Asia (see news).

Gold May Fall on ECB Rate Rise but Rising Interest Rates Likely to Lead to Much Higher Prices


Gold’s two consecutive days of nominal record highs have seen some profit taking as oil is flat, the dollar is marginally higher and the euro has fallen. The ECB’s 0.25 % interest rate hike may lead to further profit taking today but rising interest rates in an increasingly inflationary environment will be positive for gold as it was from 1965 to 1981 (see charts below)….

… It is only when real interest rates turn positive (nominal interest rates are again above the nominal rate of inflation) that gold and silver’s secular bull markets may be challenged. Inflation in the eurozone is 2.6%. Today’s interest rate rise will leave eurozone interest rates at 1.25% well below the 2.6% rate of inflation meaning that savers continue to lose out due to very low yielding deposits.

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