Prices Rebound as Fed Schemes to Induce Inflation

Clint Siegner Clint Siegner

Clint Siegner

January 23rd, 2012 Comments

Last week brought some solid gains in the precious metals, as prices continue to recover strongly from December's correction. Gold closed up $29/oz on Friday at $1,668 – up 1.7%. Silver was the big winner, putting on $2.40/oz for the week and closing at $32.23 – a gain of 8%.

Gold is up 9.5% from the December 29th lows, and silver is now up fully 22%.

Platinum gained 3.6% ($54) for the week, closing at $1,541. Its sister metal palladiumclosed up a very healthy 7% ($45) at $682. That's a gain of 13.7% for platinum and 10.3% for palladium since the lows each metal put in last month.

Once again, the gold and silver markets ended the week very near important upside resistance levels. If gold can break through $1,675/oz and silver through $32.50/oz, we could see a relatively quick move to $1,700 and $35.00 respectively.

Silver Gets a Boost from a Canadian Investment Firm

The Canadian firm Sprott Asset Management announced an additional offering of $300 million in shares of its exchange traded trust (PSLV). Buyers of these shares are getting scalped with high premiums – about 15% over the market price of silver bullion itself.

Putting aside this bad news for the actual buyers of PSLV shares, the good news is that the funds raised will be used to purchase physical silver from the market. In a small market like silver, $300 million can have a significant impact. Many analysts believe this news was the primary driver behind silver's big gains last week.

Sprott will be looking for delivery of approximately 9 million ounces at current spot market prices. Yet exchange inventories of available silver are at extremely low levels. Look for prices to get bid even higher as deliveries to the Sprott fund pinch available supplies.

Fed Open Market Committee Meets This Week

The FOMC members will gather this week and investors, as usual, will be combing their statement for clues about the direction for monetary policy. Some Fed watchers speculate that the Fed may announce the next program to print money and buy either government bonds or more mortgage-backed securities from private banks (who would love to dump them). However, most think such an announcement is unlikely at this time given that economic data has been more positive recently – lowering the political pressure to introduce new stimulus.

It is expected that the Fed will unveil a new plan to target a specific rate of dollar devaluation. The plan is referred to as "inflation targeting," whereby the Fed will attempt to create a certain inflation rate. When the official inflation rate falls below the Fed's target, it will take steps to increase inflation. This new approach appears likely to provide the political justification for more "quantitative easing" later this year.

Currency and global finance expert Jim Rickards questions conventional wisdom on the Fed's motivations. Rickards believes that the Fed is committed to a steady, controlled devaluation of the dollar as the solution to our debt woes and will make the decision to ease pretty soon. He believes the Fed will take cues from the recent strength in the dollar rather than focusing solely on economic data. The stronger the dollar versus other currencies, the greater the likelihood U.S. central bankers will expand the supply of money and credit.

Premiums and Buying Trends

Trading volume at Money Metals Exchange was relatively low last week. Customers spent approximately $2 on silver for every $1 on gold, returning to a more typical buying pattern seen over the past 18 months.

We did see a pick-up in customer selling in silver last week. The strong rally in prices over the past three weeks prompted some to lighten their positions. However, overall buying activity continued to far outweigh selling.

Premiums fell slightly on silver American Eagles and pre 1965 silver coins late last week. Inventory is in very good shape on most items.

A reminder: 2012 silver American Eagles have arrived in inventory. We still have the 2011s coming in as well, so please make sure to let us know if it is important to you to have the 2012s when you order.

We Buy Back Too!

We want customers to know that Money Metals Exchange is here to buy back gold, silver, platinum, and palladium in the common bullion forms. We certainly don't advocate selling at this time, as we think the bull market in metals has years left to run. However, if you decide to sell for whatever reason, we can lock a price with you right over the phone, deliver a purchase order to confirm the transaction, and send your payment promptly after we receive the metal. You will find we are as easy to deal with when you sell as we are when you buy!

Clint Siegner

About the Author:

Clint Siegner is a Director at Money Metals Exchange, a precious metals dealer recently named "Best in the USA" by an independent global ratings group. A graduate of Linfield College in Oregon, Siegner puts his experience in business management along with his passion for personal liberty, limited government, and honest money into the development of Money Metals' brand and reach. This includes writing extensively on the bullion markets and their intersection with policy and world affairs.