With Friends Like These Does Gold Need an Official QE3?

Wall St. Cheat Sheet

Although the trading week started quietly for precious metals, gold and silver surged after the Federal Reserve’s latest Federal Open Market Committee meeting.  On Wednesday, the Fed announced it will not increase its benchmark interest rate until at least late 2014, citing that record-low interest rates are still needed to help boost the sluggish economy.  Furthermore, Fed Chairman Ben Bernanke explained that quantitative easing is “an option that certainly is on the table.”

Before the Fed statement, gold traded near $1,650 per ounce, while silver traded close to $31.60.  After the Fed statement, both precious metals jumped to their highest levels since early December.  “We were all under the assumption that rates would be held at a low level until 2013, but now with the date extended to 2014, it’s inherently bullish for gold,” said Ralph Preston, senior market analyst with Heritage West Financial.

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Don’t Miss: Fed Extends Record-Low Interest Rates Through Late 2014.

As the charts below show, gold and silver have not only held the gains from Wednesday, but have edged higher as more U.S. dollar devaluation policies were taken on Thursday.  As of today, the U.S. now has a $16.4 trillion debt capacity, representing a $1.2 trillion increase from the previous $15.2 trillion limit.

In a 52-44 vote yesterday, the Senate failed to stop another increase in the debt ceiling target.  The new increase was the last of three requests approved in the August debt agreement.  While it is difficult to say how quickly the new debt ceiling limit will be reached, many hope it will be after the elections later this year.  David Chalian, Washington Bureau Chief explained, “If there is another big debt ceiling showdown before the election it is going to have a big impact.  I will predict that a lot of people on both sides of the aisle are trying to figure out the accounting in such a way that perhaps that discussion and vote doesn’t take place until after the election.”

The recent moves by the Fed and Congress are very friendly to precious metals.  It reinforces the belief that officials will continue to flood the economy with money in hopes of spurring growth.  This reinforcement of friendship has helped gold prices increase more than 12 percent this month, which is the best start to a year since 1980.  Meanwhile, silver prices have surged more than 18 percent this month.  Recent GDP data also suggests that the economy is far from a recovery, which will provide officials with more reasoning for additional stimulus measures.  While the U.S. economy grew at its fastest pace since 2010, the details of the report raise more uncertainties about the expansion.

The Commerce Department said on Friday that the gross domestic product grew at an annual rate of 2.8 percent in the fourth quarter, below estimates of 3 percent.  Consumer spending, which accounts for roughly 70 percent of demand in the U.S. economy, increased 2 percent, below estimates of 2.4 percent.  This is concerning as the fourth quarter was touted as the return of the consumer.  Furthermore, nonresidential fixed investment only increased 1.7 percent, compared to 15.7 percent in the third quarter.  A key factor in the 2.8 percent growth rate was a rebuilding of inventories by companies.  Zero Hedge explains, “A whopping 1.94 percent of the upside was attributable to a rise in inventories as restocking took place. And as everyone knows in this day and age a spike in inventories only leads to sub-cost dumping a few months later. In other words, the economy grew at a 0.8 percent pace ex inventories.”

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Ben Bernanke did not announce another official QE3 program on Wednesday, but previous and ongoing monetary easing polices continue to support gold and silver prices.  Bill Gross, who manages the world’s largest bond fund, believes a third, fourth and fifth round of easing “lie ahead.”

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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