Gold and silver price smack down

$37.48 was yesterday’s silver price high, followed by a plummet down to a low of $34.06 – recovering slightly to just under $35. The story was the same in gold, with a dramatic $100 smack down in the price in late morning trading at the New York Comex. Ostensibly, the reasons for this sharp price drop in precious metals (platinum and palladium experienced similar losses) and commodities more generally were comments from Federal Reserve Chairman Ben Bernanke, who sounded a note of cautious optimism about the US economy during testimony to the House of Representatives Financial Services Committee yesterday.

Bernanke noted that the drop in unemployment to 8.3% in January had “been somewhat more rapid than might have been expected, given the economy appears to have been growing during that time frame at or below its long-term trend”. However, he commented that the economy “is not growing at a fast enough clip to justify any immediate change in our accommodative monetary policy.” The part the media seem to have focused on though, is the absence of any “QE3” indicators – the Fed chairman commenting that “any change to it (current monetary policy) at the present time is not warranted.”

Jim Sinclair as ever provides must-listen commentary at King World News on the day’s events. Jesse also provides some insightful comments, noting that: “This notion that gold and silver are selling off because Bernanke is not going to do QE3 is ludicrous. He does not need to do QE3. The Fed is all over these markets in Operation Twist.”

By this he means that the Fed is continually exchanging short-maturity US government debt for longer-dated Treasuries – as a means of suppressing long-term interest rates. Given the size of the Fed’s balance sheet is currently just under $3 trillion, there is in fact plenty of scope for them to engage in this kind of activity, as Jim Rickards pointed out nearly a year ago. This is a key reason why yields on longer-term US Treasuries are as depressed as they are right now, contrary to most media analysis that rarely if ever mentions the Fed’s role in depressing longer-term US interest rates.

“Financial repression” is the term used to describe these actions; otherwise known as the continual suppression of interest rates in order that inflation slowly destroys the real value of debt. It remains an open question, however, as to whether they will be able to maintain control of this process. One thing is for sure though: they and other central banks are are playing with fire.



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