Bernanke Stays The Course, Fed Spooked?

“Bernanke stays course on Fed buying” is the FT website headline this afternoon – with the Fed chairman confirming what we’ve been saying all along: that, in his words, “a highly accommodative monetary policy will remain appropriate for the foreseeable future”.

Perhaps the Fed has been spooked by the stampede out of bonds in recent weeks following all its talk of tapering, and the damage that rising rates would do to the still fragile banking system. Or the reality that as long as Washington continues to run trillion-dollar deficits as far as the eye can see – with a relatively short maturity profile for its debt, meaning the Treasury needs to constantly roll over maturing bonds – higher rates are a one-way ticket to government fiscal oblivion. Either way, they know there’s no realistic way of getting off the QE treadmill without causing a world of hurt for the US economy – and by extension, the global economy.

But so what, you might say. I bought precious metals as a means of protecting myself financially from these problems, yet gold’s down some $400 over the last six months, with an even bigger percentage drop in silver. What gives? In short, these markets are volatile (silver especially). Gold gained every year from 2001 to 2012. A large correction was not only inevitable, but also healthy when considering the longer-term value of the metal in relation to other assets, goods and services.

In more specific terms, however, there have been some extremely interesting developments in the gold market since the start of the year in relation to warehouse inventories, gold leasing rates and how this relates to the Bundesbank’s January request for the return of its gold from New York, as well as Hugo Chavez’s request – in August 2011, just before the nominal gold price peak – for the return of Venezuela’s gold from London. For the gory details, be sure to read Grant Williams’s latest “Things that make you go hmmm” newsletter. It’s well worth the time.