Yesterday, Ben Bernanke, the Federal Reserve’s Chairman, stated that he supports stimulus for the foreseeable future, which sent a message to the markets that the Fed’s bond buying program and continued monetary easing will likely continue for some time. The markets responded predictably, with the dollar dropping in value and the gold and silver markets rallying.
The performance of gold and silver typically responds inversely to economic data and the dollar. In other words, when economic data appears to show fundamental weakness in the economy or job market, as was the case with today’s jobless report, the gold and silver markets typically rally.
Not only does gold and silver perform well when economic and jobs data falls short of expectations, but they historically have performed well as a hedge against inflation and as a flight to quality amidst economic and financial uncertainty, as was the case during the 2008 global financial meltdown.
Of course, if the Federal Reserve continues to inflate the monetary base, and banks ramp up their lending, we’ll eventually experience higher inflation rates. Higher inflation rates erodes the value of the dollar and fixed income assets, such as bonds, and will likely result in gold and silver being a favored asset classes.
While it’s impossible to predict the short term performance in the price of gold and silver, at this point in time, the markets appear to be favorable toward a strengthening precious metals market. Of course, the Federal Reserve can change policy on a dime, and new economic data may support strength in the economy, but for the time being, gold and silver are seeing a nice overdue rally.
