Ben Bernanke revealed Wednesday that the Federal Reserve was ready to lower interest rates next month to fight the sluggish economy.
He also implied that The Fed has not anticipated the level of inflation in energy and hard asset prices. So much for forecasting. But Bernanke acknowledged it’ll be “hard to maintain low inflation” if prices keep doing what they’re doing.
The US dollar fell following his remarks. More and more, investors are seeing it as a low-yielding asset. The Greenback is currently trading around 1.5120 against the Euro, and around 0.9415 against the Australian Dollar.
The weak US Dollar performance pushed oil, silver and gold to new highs. The Nymex Gold futures contract for April delivery hit a new high of $967.70 an ounce during the trading session, and closed at $961.
The Silver contract closed at $19.40 yesterday, a new high in the rally begun last December.
The recent acceleration in the gold price is not solely explained by traditional long-term investors though. People aren’t just turning to hard assets to hedge their portfolios and to protect themselves against eroding purchasing power. There is more than that.
In fact, the big players have taken a dip in the pool of fear. Recent turmoil in stocks and the economic uncertainty have scared hedge funds and proprietary traders.
These big-time traders are evacuating risky assets, now that subprime and the credit crunch has taken hold. The gold market beckons. Hedge funds have extended the bullish gold trend, pushing the market up further as they evacuate stocks.
This accelerated action leads us to one conclusion… gold and silver markets will become more technical. Charting will be important. Traders will pay more attention to their exit and entry positions. It’s now a market in momentum, and the momentum at this stage is upwards.
Until now profit taking has been moderate, but the story may change quickly.
Firstly, history shows that when the economy switches from slow growth to negative growth, even commodities prices eventually ease.
The main short-term concern is traders and funds liquidating their bets. Silver and gold prices are now moving into unknown territories, with higher volatility. Moreover, for both assets, strong psychological levels ($1,000 for the gold price and $20 for the silver price) are just ahead. It means that we could see a potential pullback.
But after that… the sky’s the limit. After a few weeks of technical resistance and profit-taking, further news regarding the economic outlook may urge funds and speculators to take another dip, building new momentum in the gold price and silver price.
The Daily Reckoning Australia