August was an impressive month for precious metals. Both gold and silver broke out of their tight summer ranges and closed at fresh multi-month highs. The breakout occurred as Ben Bernanke delivered his highly anticipated speech at Jackson Hole. Although the Fed Chairman did not specifically name another quantitative easing program, his words appeared to be a closing argument for more central bank action.
Early in the speech, Bernanke claims that large-scale asset purchases can influence financial conditions and reduce concerns about risks such as deflation. He then reminds the audience about the central bank’s quantitative easing programs, which started in November 2008 with the Federal Reserve announcing to purchase $600 billion in agency MBS and agency debt. Since then, the Fed has conducted $2.3 trillion in various bond purchases. To little surprise, the central bank’s own studies have proven this to be helpful to the economy. Bernanke explains, “Model simulations conducted at the Federal Reserve generally find that the securities purchase programs have provided significant help for the economy.” He also says that “it is probably not a coincidence that the sustained recovery in U.S. equity prices began in March 2009, shortly after the FOMC’s decision to greatly expand securities purchases. This effect is potentially important because stock values affect both consumption and investment decisions.”
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This is a very telling statement from the Chairman. He is publicly recognizing the wealth effect the Federal Reserve is trying to create by propping up equity markets. While consumers and investors realize something is still wrong with the economy, they can not help but feel somewhat better when their 401k balances are significantly higher than from the 2009 lows. However, those who have purchased hard assets such as precious metals have also felt the wealth effect. Since November 2008, fiat currency devaluations around the globe have paved the way for gold prices to more than double, while silver prices have tripled.
Central banks often receive criticism for higher living expenses due to inflation via money supply increases, but Bernanke defends the Federal Reserve’s monetary actions. He states, “And despite periodic concerns about deflation risks, on the one hand, and repeated warnings that excessive policy accommodation would ignite inflation, on the other hand, inflation (except for temporary deviations caused primarily by swings in commodity prices) has remained near the Committee’s 2 percent objective and inflation expectations have remained stable.”
As usual, Bernanke concluded his speech with the Federal Reserve’s new favorite monetary tactic, jawboning. “The Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability,” he explains. Bernanke delivered a speech in 2002 that closely resembles what the Federal Reserve has done during the recent financial crisis. Interestingly, he notes that deflation can be staved off by increasing the amount of U.S. dollars in circulation, or even by credibly threatening to do so. Given the central bank’s numerous bond purchasing programs, Bernanke has plenty of credit when it comes to jawboning. However, at some point in time, he will be forced to take more definitive action. When that occurs, gold and silver investors will once again realize the benefits of holding a currency that can not be printed at will.
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Disclosure: Long EXK, AG, HL, PHYS