The Fed Whispers Sweet Nothings to Gold & Silver

May was a disastrous month for the market, as the “sell in May and go away” mantra reared its ugly head. For the month, the Dow Jones Industrial Average and S&P 500 both fell more than 6%, while the Nasdaq dropped 7.2%. In fact, The Dow and Nasdaq suffered their worst monthly decline since May 2010. Precious metals also experienced sharp pullbacks as the US dollar hit its highest level since 2010. The trend for equities carried over into June, but gold and silver have outperformed as more stimulus chatter circulates.

On the first day of June, another disappointing jobs report paved the way for the Dow’s worst decline of the year, falling nearly 300 points. The American economy only added 69,000 new jobs and the unemployment rate ticked higher to 8.2%. The report prompted more slowdown fears, but more importantly, precious metals showed their true colors. As the Dow erased all of its gains for the year, gold and silver surged more than 3%. The momentum in the two safe-havens continued into this week and all eyes are on the Federal Reserve to juice the markets higher.

Wednesday, gold and silver are climbed higher once again as the Wall Street Journal reported that the Fed is considering more action amid recovery doubts. Fed Whisperer Jon Hilsenrath writes, “Fed policy makers could take a small precautionary measure, like extending for a short period its ‘Operation Twist’ program, in which the Fed is selling short-term securities and using the proceeds to buy long-term securities. Or, policy makers could take bolder action such as launching another large round of bond purchases if they become convinced of a significant slowdown.” The Fed’s next policy meeting is on June 19 and 20, while Operation Twist is currently scheduled to end this month. Hints of more easing may also be evident on Thursday when Fed Chairman Ben Bernanke testifies before the Joint Economic Committee of Congress.

Although the Fed news is receiving much of the focus today, the factors that have contributed to the rise of gold and silver over the past decade are still in place. Central banks around the world continue to provide stimulus measures and massage interest rates lower, providing an ideal environment for negative real interest rates. In addition to record low interest rates in the US, Brazil’s central bank recently cut interest rates by 50 basis points to a record low of 8.5%. Earlier this week, Australia’s central bank also reduced interest rates for the second consecutive month, citing a weaker outlook abroad and modest domestic growth. “The Board judged that, with modest domestic growth and a weaker and more uncertain international environment, the outlook for inflation afforded scope for a more accommodative stance of monetary policy,” RBA Governor Glenn Stevens said in a statement.

As a result of ongoing and future stimulus efforts, nations around the globe hoard precious metals as a safe-haven. According to Bloomberg via data from the Hong Kong government, “Gold imports by mainland China from Hong Kong climbed 65% to a record in April, advancing for a third straight month as investors sought a hedge against financial-market turmoil and an economic slowdown. Shipments totaled 103,644.5 kilograms (103.6 metric tons) in the month from 62,913 kilograms in March.” Goldcore also indicates that Iran imported $1.2 billion worth of precious metals from from Turkey in April, compared to only $7,500 a year earlier. The US placed sanctions on Iran earlier this year prohibiting it from using the global payments system, Swift. Thus, Iran has turned to the time-tested method of gold to aid its international trade.

In a note this week, Commerzbank said it expects gold to rise further, having regained its safe-haven status. “Gold has now successfully bounced off the major 1532.20/1522.48 support zone which is made up of the September and December 2011 lows and has so far shot up to 1,630.02,” according to Reuters. On Wednesday, gold climbed to as high as $1,642.40, while silver hit as high as $29.82.

In our May 21 premium newsletter, we warned subscribers that the gold spike down towards $1,525 stood a very good chance to mark a low on the year. Since then, gold prices have rallied more than 7%, while the miners have performed even better. If you would like to receive professional analysis on equity miners and other precious metal investments, we invite you to try our premium service free for 14 days.

Disclosure: Long EXK, AG, HL, PHYS

To contact the reporter on this story: staff.writers@wallstcheatsheet.com 

About the Author
Eric McWhinnie

Eric McWhinnie is the chief commodities analyst at Wall St. Cheat Sheet. He has been an analyst at Wall St. Cheat Sheet since early 2010. He has worked at State Street and Waddell & Reed in financial advisory services and is also the editor of Wall St. Cheat Sheet's Gold & Silver Investment Newsletter and Commodities Investment Newsletters.

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