In a recent interview with CNBC, Silver Wheaton Corp. (USA) (NYSE:SLW) CEO Randy Smallwood said that as long as central banks continue to pursue a course of quantitative easing, he sees the prices of both silver and gold rising. In the same interview he discussed a recent move by his company to become more involved in the gold market through its purchase of two gold streams from Brazil’s Vale SA (NYSE:VALE). While Smallwood didn’t give any specific price targets, he stated that he remains bullish on the space. Silver Wheaton is increasingly well positioned for the coming economic realities and should be considered a buy for the long term.
The Federal Open Market Committee, FOMC, made clear last December that it intends to keep interest rates near zero until there is a “substantial” improvement in the unemployment rate. The term was finally defined as meaning until either inflation creeps above 2.5% or unemployment falls below 6.5%. The sentiment was repeated last month and appears to be exactly the type of central bank behavior that Smallwood is talking about.
Confusing the situation, however, are remarks made by the chairman of the Chicago Fed, Charles Evans, this week. Evans, who is a voting member of the FOMC this year, said: “I tend to think it might be possible to turn off the quantitative easing. We might be able to stop before 7 percent.” This projection seems completely at odds with other comments made during the same interview in which he said that rates would remain depressed until the 6.5% unemployment level or beyond. He also said that he did not foresee the labor market reaching the desired level until mid-2015.
The only way that all of these comments are consistent is if you read them as Evans saying we could stop if we want, but we’re not going to. Printing money is just too much fun. The Fed could stop any time it wants, but it does not have a problem – it’s not denial if you’re not a print-o-holic. Smallwood characterized the actions of central banks very accurately: “We see our currencies of the world are racing to devalue each other faster so that they can compete against each other.”
The bullish case for metals
Given the position of the Fed and other central banks, it seems clear that loose monetary policy is going to be the order of the day for some time. While the Fed has inserted the 2.5% inflation level as a safety valve for shutting off the spigot, there remains the possibility that by the time “QE4EVER” stops, putting the brakes on inflation will be all but impossible. Against this inflation, silver and gold are attractive.