On Monday, Ben Bernanke delivered a speech at the National Association for Business Economics spring conference in Virginia that ignited financial markets.  The Federal Reserve chairman noted some positive signs in the job market, but remained cautious on the future.  Once again, he signaled the Federal Reserve may need to provide more easing to stimulate growth and reduce long-term unemployment.  As a result, gold prices jumped nearly $20, while silver gained more than 50 cents.

In his speech, Bernanke explained the better jobs numbers were somewhat out of place with the overall speed of economic expansion.  Even though the unemployment rate has been declining in previous months and currently stands at 8.3 percent, it is still well above pre-crisis levels.  “After nearly two years of job gains, private payroll employment remains more than 5 million jobs below its previous peak; the jobs shortfall is even larger, of course, when increases in the size of the labor force are taken into account.  And the unemployment rate in February was still roughly 3 percentage points above its average over the 20 years preceding the recession.  Moreover, a significant portion of the improvement in the labor market has reflected a decline in layoffs rather than an increase in hiring,” Bernanke said.

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Bernanke also added, “The number of people working and total hours worked are still significantly below pre-crisis peaks, while the unemployment rate remains well above what most economists judge to be its long-run sustainable level.”  Bernanke’s recent statements about high unemployment suggest that the central bank is completely prepared to keep interest rates near zero until at least late 2014.  When inflation is factored in, ultra low interest rates translate into negative real rates, an environment that is bullish for hard assets such as gold and silver.

Earlier this month, in the Federal Open Market Committee meeting, the Federal Reserve did not announce any changes in its monetary policy.  This was blamed as the reason for the recent pullback in gold and silver.  Over the past couple weeks, gold prices fell from $1,700 to $1,630 per ounce, while silver declined from $33.75 to $31.50 per ounce.  However, the big picture for precious metals has not changed.  The economy is still struggling and the Federal Reserve is willing to use the printing press to kick the can down the road until it falls off a cliff.  According to the latest financial statement released last week, the Federal Reserve’s balance sheet surged 20 percent to $2.9 trillion in 2011.  U.S. Treasury holdings grew 64 percent to $1.75 trillion, accounting for the majority of the balance sheet.

Since Bernanke believes cyclical rather than structural factors are the primary source of long-term unemployment, he expects stimulus to counter the weak job market, however, he also leaves room for his hypothesis to be wrong.  In this case, he still believes the Fed can support employment and growth levels through ongoing accommodating policies.  “If this hypothesis is wrong and structural factors are in fact explaining much of the increase in long-term unemployment, then the scope for counter-cyclical policies to address this problem will be more limited.  Even if that proves to be the case, however, we should not conclude that nothing can be done,” Bernanke explained.

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Disclosure: Long EXK, AG, HL, PHYS

To contact the reporter on this story: Eric McWhinnie at staff.writers@wallstcheatsheet.com

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