The Conversation (0)
Silver prices rose for a second consecutive session on the back of the Federal Reserve commitment to near zero interest rates through 2014. However, the target inflation rate of 2 percent has caused some to question the strength of silver and gold as an investment hedge.
By Michael Montgomery—Exclusive to Silver Investing News
Silver prices have made gains over the past two trading sessions with prices now solidly over the $30 per ounce psychological resistance level. The white metal’s gains are largely attributed to a weaker US dollar, rising oil prices and the recent statements by the Federal Reserve on interest rates and inflation. However, a key statement made by the Fed which is being overlooked may be a bearish factor for precious metal prices going forward.
On the day, spot silver traded up $0.20, to close at $33.47 per ounce. Prices tested the $34 mark with a session high of nearly 33.80.
Wednesday’s announcement by the Federal Reserve revealed that interest rates would be kept at their current near zero level until at late 2014. This loose fiscal policy has been the key argument of silver and gold bugs.
Precious metal bulls jumped on the announcement, equating the continuation of the historically low interest rates as being equal to that of a new QE program, or at least QE2.5. The market reacted, buying silver and gold as an anti-inflation hedge.
However, the Fed statement also contained language that stands as a major counterpoint to the hyper-inflation argument.
“The US central bank made it clear (for the first time really) that it is targeting the former at 2% and the latter at 4 to 5 percent. Neither figure is set at a level that would warrant runaway prices in inflation hedges or interest-sensitive assets,” stated Jon Nadler, for Kitco.
Ben Bernanke stated that inflation rates for 2012 are likely to fall below their target of 2 percent. In addition, the Fed also stated that it was not targeting a specific unemployment figure.
“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… Investors are conditioned by the first QE and QE2. In both cases, gold and silver ran…” stated Nigam Arora, in an article on Marketwatch.
While the low interest rates and loose fiscal policy are a supportive factor for precious metals in the very short term, the lack of inflation predicted through at least 2014 may be negative.
The debate over the real rate of inflation is a hotly contested issue. However, inflation has yet to explode as many precious metal bulls have been prognosticating since the economic collapse in 2008.
If inflation does indeed stay below the 2 percent target through 2014, the arguments made by Nadler, Arora and others is one worth noting.
Going forward the silver bulls have a technical advantage. Investors should continue to look for silver to trade inversely to the US dollar, and in line with oil prices. “Bulls’ next upside price breakout objective is closing prices above solid technical resistance at the October high of $35.68 an ounce,” stated Jim Wyckoff, for Kitco. The downside breakout objective is a closing price below $31.00 per ounce.
