The Federal Reserve on gold and silver

The Federal Reserve does not directly comment on gold and silver. But for the first time in the living memory, the Fed sent a clear signal in a message about interest rates to sell them both.

However, market participants did not listen and ran the two up. After the 12:30 pm EST announcement from the Fed, the SPDR Gold Trust ETF  and iShares Silver Trust , the Market Vectors Gold Miners ETF  and popular miner stocks such as Newmont Mining Corp., Barrick Gold Corp and Silver Wheaton Corp.  saw explosive buying.

Famed investor Benjamin Graham said that in the short term the market is a voting machine, but in the long term it is a weighing machine. In other words, in the short run, gold and silver moved based on the prevailing consensus opinion, but in the long run, the true value of gold and silver will be reflected in their prices.

After the 12:30 pm Fed announcement, gurus were out in full force recommending aggressively buying gold and silver.

“Fed Promises Exceptionally High Inflation For Three More Years,” shouted the headline from a well circulated newsletter.

Previously, the Fed statement promised exceptionally low interest rates until mid-2013. In the 12:30 pm statement, the Fed said that it expects exceptionally low interest rates until late 2014.

The Fed action amounts to QE2.5 (Quantitative Easing).

The Fed move was interpreted as inflationary and it made sense for gold and silver to spike.

In other words, the Treasury’s printing presses will run harder and longer. Up to this point, gurus and investors were right in running gold and silver up.

However everything changed when the Fed provided more information later in the afternoon. For the first time in my memory, the Fed said that it will use 2% as an inflation target. The Fed also said that it was not targeting any specific unemployment number.

Both of the foregoing statements are very negative for gold and silver. The Fed gave us a clear signal to sell gold and silver, but nobody listened.

In simpler words, the Fed stated that it will destroy 2% of the value of the U.S. dollar every year and no more.

If the markets were logical, the interpretation would have been that gold and silver should go up 2% every year to compensate for the loss in the value of the dollar.

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Posted by Silver Guru on Jan 26 2012. Filed under Silver Analysis. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry