Considering most analysts anticipated that Federal Reserve Chairman Ben Bernanke would announce Wednesday he was finally easing off the throttle of his bond-buying program, the markets were overcome with shock and awe as he declared he had no plans whatsoever to halt his massive and infinite quantitative easing effort.
The stock market ripped to new record highs after the announcement on the understanding that the drunken excess was going to continue. Yet gold and silver also surged as buyers realized the accompanying hangover that will most assuredly come will be even more painful than before.
As savvy investor Marc Faber said, the Fed’s position has become completely untenable and “the endgame is a total collapse, but from a higher diving board.”
What the announcement also suggests is that the economy is far weaker than we were led to believe. The Fed cut by as much as 17% its estimates for GDP growth next year, from 3%-3.5% in June to 2.9%-3.1% on Wednesday, no doubt driven in large part by its estimates for personal consumption expenditures inflation tumbling by 10% at the high end to 1.8%. That’s significant because the Fed has said it will not raise short-term interest rates — keeping them near 0% — so long as PCE inflation is below 2.5% and unemployment rates remain above 6.5%. It expects unemployment to remain between 6.4% and 6.8% next year, though we all know the nonparticipation rate, the true measure of those without jobs, is at all-time record highs.
That bodes well for gold and silver to recover their role as hedges, and is why I’ve maintained all along there is a coming boom again in their prices. The miners themselves benefited from the news, most gaining double-digit percentage increases, though perhaps the greatest risk for them lies not in an economy that truly improves, but whether they’ve hedged production and to what extent.
Earlier this year Great Panther Silver Ltd (USA) (NYSEMKT:GPL), which jumped 11.5% yesterday, reported it had no hedges on its silver , while Pan American Silver Corp. (USA) (NASDAQ:PAAS) presciently just announced it was closing out all of its hedged silver and gold positions, which represented 20% and 18%, respectively, of its forecast production. At prices of roughly $20 per ounce for silver and $1,323 per ounce for gold, it could have sustained a serious impact if the precious metals take off as expected. Its stock was up 9% yesterday. Silver Wheaton Corp. (USA) (NYSE:SLW) is 100% unhedged and was up a like amount to Pan American Silver Corp. (USA) (NASDAQ:PAAS).