Thursday, November 4, 2010

Fed Announces QE2 - Silver and Gold Reaction

Overnight we saw the latest announcement from the Federal Open Market Committee (FOMC). Details of this announcement have been anticipated for some time and there has been a lot of speculation around how many dollars worth of treasury securities/assets they might purchase. Judging from the markets reaction (which was volatile over the speech itself) I would think that the amount they are spending is inline with expectations.
Press Release - FOMC
To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.
Federal Reserve
This upcoming announcement had me slightly wary of purchasing any shares (over and above my existing holdings) incase of a lower than expected amount, but I think $600B will be enough to avoid any large asset sell offs.

There was weakness in the precious metals prices and related stocks prior to and during the announcement, though by the end of the trading session the prices were not that far down with the HUI off -.83%, Silver and Gold both down by under 1% each also. I think if Gold/Silver stocks are down today (highly likely inline with the HUI or similar) during Australian trading (ASX) it will be a great time to pick some up at an intermediate low. The HUI (while closing negative for the day) is still above the recent breakout of approximately 520 and looking likely to surge into the latter part of the year during which time I also expect Gold and Silver to once again climb higher. The XGD (Australian Gold stocks index) broke out in late August/early September and has been in consolidation since mid September, I expect a further surge higher to start soon.

Earlier on my blog I announced a Silver target of USD $28-31 for the short term (expecting to see by end of year). The GSR (Gold:Silver ratio) has usually spiked down to around 50 during times of high interest in precious metals over the last couple of years, so using a GSR of 50 I am expecting the price of Gold to reach approximately USD$1400-1550 over the same time frame.

Interesting developments in the Gold and Silver markets continue with Iran recently announcing that they have moved 15% of their foreign reserves into Gold:
Iran Switched 15 Percent of Reserves Into Gold, Mehr Reports
Oct. 31 (Bloomberg) -- Iran has changed some 15 percent of its foreign exchange reserves into gold and will not need to import the metal for the next ten years, Mehr reported, citing Central Bank Governor Mahmoud Bahmani.

Iran’s gold reserves have “multiplied several times” in the past two years, Bahmani said in a report published late yesterday by the state-run news agency.

Bahmani gave no specific figures, only saying the country consumes 30 tons of gold a year and that the central bank will have “ample supplies for the next 10 years” even if it doesn’t increase its gold holdings further.

Iranian President Mahmoud Ahmadinejad said yesterday his country’s foreign exchange reserves exceed $100 billion.
Also the day following Bart Chilton's (CFTC Commissioner) speech last week about Silver price manipulation we saw lawsuits lodged by two traders against large US Investment Banks JP Morgan and HSBC:
HSBC, JPMorgan Accused in Suit of Placing ‘Spoof’ Silver OrdersOct. 28 (Bloomberg) -- HSBC Holdings Plc and JPMorgan Chase & Co. were accused in an investor’s lawsuit of placing “spoof” trading orders to manipulate silver futures and options prices in violation of U.S. antitrust law.

The investor, Peter Laskaris, alleges that starting in March 2008, the banks colluded to suppress silver futures so that call options, or the right to buy, would decline, and put options for the right to sell would increase, according to the complaint filed yesterday in federal court in Manhattan. The collusion was also intended to maintain prices at levels at which some options would expire as worthless, Laskaris claims.
There have been rumours circulating on the internet that GATA would be involved in a class action lawsuit against the large investment banks with large short positions. It is unclear at this stage whether the above cases will be those they are involved with or if there are others on the way (or the rumours may be unfounded). While I would like to see justice served here these traders will need deep pockets for any likely success against these banks in my opinion. I would not be surprised to hear that the lawsuits were lodged more-so to raise awareness of the issue rather than with the likelihood that they would come away with a win against the banks.

Disclosure: Position held in Gold & Silver. Not investment advice. Do your own research.

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