(Posted: June 27, 2012)
Gold shed more than $50 an ounce in a blink following last Wednesdayâ€™s news from the Federal Reserve that Americaâ€™s central bank would not, at least not now, initiate another round of quantitative easing, opting instead for more muted monetary stimulus by extending its â€śOperation Twistâ€ť through year-end.
Operation Twist, in which the Fed sells short-term U.S. Treasury securities from its portfolio and simultaneously purchases longer-dated Treasury notes and bonds, is intended to stimulate the economy by lowering medium- and long-term interest rates without actually speeding up growth in the money supply. In contrast, quantitative easing (QE for short) expands the Fedâ€™s holdings of Treasury securities â€“ what some call expanding the Fedâ€™s balance sheet â€“ thereby creating new money and prompting a stepped up pace in monetary growth . . . and ultimately more inflation.
The recent correction in gold and silver prices has some precious metals pundits already writing obituaries for these metals. Last week, gold in New York was off more than three percent, falling from a recent high near $1,627 to $1,570 â€“ just about giving up all of this yearâ€™s gains and, worse yet, down some 18 percent from its all-time high last September. Meanwhile, silver fell by more than six percent from $28.75 an ounce to $26.90 â€“ and at weekâ€™s end silver was off some 3.4 percent for the year to date and more than 45 percent from its April 2011 peak.
This backtracking in gold and silver does not signal a new bearish phase for precious metals prices. At worst, it calls for more patience from investors and savers holding these metals as they await the next major move up in a still very much intact bull market. More importantly, the current weakness in gold and silver prices simply gives smart investors and fearful savers more time to buy the protection and financial insurance offered by these metals.
The timing of more monetary stimulus from the Fed â€“ and the next major upward move in gold and silver prices â€“ depends either on the economic news here in America (with bad news raising the chances of more quantitative easing sooner rather than later) or an impending financial disaster in Europe.
I expect continued weakness in the U.S. economy, especially an unacceptable low rate of new jobs creation, to prompt another round of quantitative easing (QE3) by the Fed later this year (possibly as soon as the August Federal Reserve policy-setting meeting) or in early 2013 â€“ that is, if events in Europe donâ€™t first call for coordinated monetary stimulus from central banks on both sides of the Atlantic and around the world.
Despite yet another round of funding for Europeâ€™s sickest economies and banks â€“ and regardless of whatever decisions are taken at the upcoming European summit later this week â€“ the Eurozone will continue to unravel. Thereâ€™s just no way that citizens of the peripheral economies will continue to accept austerity, collapsing economies, rising joblessness, and deteriorating living conditions for years to come.
Sooner or later, I expect an impending if not actual default by one or another sovereign borrower or failure of one or another major European bank (what some are calling a â€śLehmanâ€ť moment recalling Americaâ€™s 1998 banking crisis) will trigger an unprecedented flood of new money from the Fed, the European Central Bank, and other central banks in Europe and Asia â€“ assuring that gold and silver once again shine brightly.