Gold and Silver Surge in First Trading Session of 2012

Wall St. Cheat Sheet

The new year started off with a bang in the financial markets.  Although many investors were cheerful of the big rally in the Dow Jones Industrial Average, precious metals out-shined the competition.

On Tuesday, the U.S. dollar declined as the euro currency and equities edged higher. Gold prices climbed $33 to settle back above $1,600 per ounce.  It was the biggest jump for gold in 10 weeks.  Meanwhile, silver prices surged $1.66 to close at $29.57 per ounce.  During the trading highs on Tuesday, silver surged the most in over three years.  “Fear trade is back because of Iran,” Adam Klopfenstein, a market strategist at Archer Financial Services Inc. in Chicago, said in a telephone interview. “Also, we are seeing buying across commodities because of the weaker dollar.”

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Investor Insight: How Did Gold and Silver Perform in 2011?

Tensions continue to build between the U.S. and Iran over the Strait of Hormuz, which is considered the world’s most important oil choke-point.  It is estimated that 17 million barrels of oil pass through the strait on a daily basis.  On Tuesday, Iran’s army chief warned the U.S. Navy not to return an aircraft carrier back to the Persian Gulf after it was removed due to Iran’s naval exercises in the area.

In addition to uncertainty in Iran, gold continued to edge higher in late Tuesday trading after the most recent Federal Reserve announcement.  The central bank announced it will begin to publish policymakers’ projections for its benchmark interest rate on overnight loans, and when officials expect the first rise to occur.  Such projections will be published for the first time when the Fed releases its quarterly economic forecasts following its January 24-25 meeting.  “Accommodating monetary policies throughout the developed world cause a renewed migration to hard assets by individual investors and sovereign-wealth funds,” Byron Wien of Blackstone explained.

Minutes from the last Federal Open Market Committee meeting show that a number of Fed officials believed economic conditions could “well” warrant a further easing of monetary policy, though a few others believed further stimulus would be a bad idea, and that an enhanced communications framework could make any policy shift more effective.  As we have warned our Premium Newsletter subscribers several times, interest rates are likely to remain near zero percent beyond mid-2013, which is very bullish for gold.  The latest Fed announcement will give the central bank another channel of communicating additional easing.  Although the Fed is seeking to provide more clarity in the markets, many investors have already realized that the Fed will be unable to raise interest rates due to massive debt levels.

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

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com