Fed Chatter and Caterpillar Outlook BOOST Gold and Silver

Wall St. Cheat Sheet

The markets continue to trade on hopes of more quantitative easing from the Federal Reserve. On Tuesday, the Dow Jones Industrial Average fell by triple digits for its third consecutive session. Although the blue-chip index was down by 200 points going into the close, its losses were cut in half as another central bank stimulus story hit trading floors. Equities continued to rise Wednesday morning with the Dow jumping more than 100 points at the open, but gold and silver outperformed as precious metals remain the place to be for more dollar devaluation.

In the final minutes of Tuesday trading, the WSJ reported that Fed officials were closer to taking new steps to stimulate growth and hiring. Jon Hilsenrath writes, “Amid the recent wave of disappointing economic news, conversation inside the Fed has turned more intensely toward the questions of how and when to move. Central bank officials could take new steps at their meeting next week, July 31 and Aug. 1, though they might wait until their September meeting to accumulate more information on the pace of growth and job gains before deciding whether to act.” He goes on to explain that the central bank could purchase mortgage-backed or Treasury securities, or even extend record low interest rates beyond 2014.

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While the developments are nothing new, as Fed Chairman Ben Bernanke has said several times that the central bank stands ready to act if needed, it provided enough optimism to send gold prices nearly 2 percent higher to above $1,600 an ounce for the first time in two weeks. The safe-haven metal hit as high as $1,606.40 per ounce, while silver jumped to $27.41 per ounce. The Fed chatter also caused the U.S. dollar to sink against the euro, breaking the greenback’s five-day winning streak against the 17-nation currency.

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Precious metals may also be receiving support from Caterpillar, the world’s leading manufacturer of construction and mining equipment. Before the opening bell, the company reported another impressive quarter. Net income jumped 67.4 percent, while revenue increased 23.3 percent. “Worldwide demand for most commodities has increased so far this year,” reported Caterpillar. More important though, the company provided its thoughts on the Fed. Caterpillar explained, “The U.S. Federal Reserve’s balance sheet expansion in the first half of 2010 benefited the economy, but those gains seem to be slowing.  Banks are expanding credit at a moderate rate, but money growth is slowing.” Going forward it expects the central bank to “resume expanding its balance sheet” and for the European Central Bank to provide “additional actions this year.”

Those doubting Caterpillar’s monetary easing forecast should keep in mind that in October the company announced it expected to see “additional actions to maintain liquidity growth” and for the ECB to reverse their recent interest rate increases. Since then, the Fed has extended its low interest pledge to at least 2014, launched emergency swap lines and pushed Operation Twist to the end of this year. Furthermore, the ECB created two liquidity programs known as Long-Term Refinancing Operations and slashed its benchmark interest rate to a record low.

As our premium subscribers know, central banks around the world are involved in a race to debase fiat currencies. Currently, the U.S. dollar is falling behind by receiving strength, and it is hitting financial results for American companies, thus threatening Bernanke’s wealth effect. When the Fed cannot jawbone markets any longer and launch another major stimulus package, gold and silver stand to benefit as they have done for the past decade.

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Disclosure: Long EXK, AG, HL, PHYS