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While prices for silver traded fairly flat today the big news came from statements made by Fed Chair Ben Bernanke at the Federal Open Market Committee. The Fed lowered prospects for US economic growth and hinted that another round of stimulus measures is not off the table. Prospects of QE3 have stoked the flames of silver bulls.
By Michael Montgomery—Exclusive to Silver Investing News
US economic outlook and Fed statements
More jobs were added in October than had been previously projected. Private employers added 110,000 jobs topping economists’ expectations of 101,000. The ADP National Employment report also increased data from September’s jobs data to 116,000 from the previously reported 91,000. While the additions are good news for the US economy, they are not large enough to satisfy the Fed that the economy is heading in the right direction.
“You’re more or less treading water here, just enough to keep the unemployment rate steady,” stated Scott Brown, chief economist at Raymond James in St. Petersburg, Florida, adding, “”We would really like to see stronger growth to get the unemployment rate down substantially, but the Fed is not expecting that to happen any time soon.”
A recent analysis of the slow US job growth predicts that full employment might not be achieved for 12 years. This gloomy prediction is underscored by the recent Fed projections that have cut growth for this year to between 1.6 to 1.7 percent, down from 2.7 to 2.9 percent. The fed also cut growth projections for 2012 to 2.5 to 2.9 percent down from 3.3 to 3.9 percent.
The Federal Open Market Committee (FMOC) voted to take no action at this time. However, the struggling economic recovery in the US has also prompted the Mr. Bernanke to hint that additional monetary stimulus may be needed.
Federal Open Market Committee member and Chicago Fed President Charles Evans, was the sole member to vote against the Fed’s decision to take no action because he supported “additional policy accommodation at this time,” according to the central bank’s statement.”
Although no action was taken, it seems almost certain that the Fed will act soon. Mr. Bernanke mentioned buying mortgage-backed bonds. The Fed hopes that such purchases would help boost home-buying and consumer spending. ‘Operation Twist,’ which sold short term bonds in order to purchase long term bonds, is a neutral factor for precious metals as there is no increase to the money supply, reducing the inflationary effects.
Prospects for QE3
Analysts are mixed on whether a third round of quantitative easing is around the corner. Jon Nadler commented that the tone of the FMOC statement was “No QE3—Unless we need to launch it.” This feeling was backed up by Fed Vice Chairman Janet Yellen who stated that a third round of asset purchases “might become appropriate” if economic conditions were warranted.
A round of QE3 would add to $2.3 trillion total of the first two rounds of easing measures; precious metals prices exploded after the first two rounds. Over the period of QE1 silver shot up nearly 100 percent compared to the Dow which raised 20 percent in the same period. QE2 resulted in silver’s rises of 161 percent before correcting in April of this year. However, silver is still up 83 percent since the start of QE2.
If a third round of easing measures is announced it is safe to assume that it will be bullish for silver. However, with every spike in volatility with precious metals COMEX has increased margin requirements. Each margin increased has resulted in massive sell-offs for silver, April’s crash in prices is a prime example. For silver, ongoing economic concerns should be a supportive factor for prices. If the Fed does decide on another round of easing measures look for the silver bulls to jump full force into the market.
