Gold, silver soar on Fed commentary

By Alix Steel, TheStreet

Updated at 4:10 p.m. ET

Gold settled at a new record and silver prices rallied Wednesday as the Federal Reserve confirmed that it would maintain an easy money policy for the medium term.

Gold for June delivery settled up $12.30 to $1,517.10 an ounce at the Comex division of the New York Mercantile Exchange. Gold prices stayed in a tight range, trading between $1,517.10 and $1,503.30 an ounce. The U.S. dollar index was down 0.1% to $73.66.

Silver prices bounced back from Tuesday’s 4% sell-off, adding 90 cents to settle at $45.95 an ounce. Both metals were climbing even higher in after-hours trading. Gold was up $21 while silver was up nearly $2.50. The spot gold price was climbing $22.40, according to Kitco's gold index.

The Fed unveiled no surprises with its latest FOMC rate decision Wednesday, and gold and silver were rallying as a result. Interest rates will stay low for an extended period of time, and there were no changes to policies or forecasts. One minor tweak was a slight downgrade of the economy, as the Fed said "the economic recovery is proceeding at a moderate pace." In March, it used the phrase "firmer footing."

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Stocks reacted well to the news as well. The Dow Jones Industrial Average ($INDU) closed up 96 points to 12,691, the S&P 500 ($INX) ended up 8 points to 1,356, and the Nasdaq ($COMPX) added 22 points to 2,870.

The slight downgrade coupled with a slow employment recovery means no change in policy. No change in policy means the Fed will let QE2 expire but continue to reinvest profits, keeping its current balance sheet the same. The cheap money trend will continue, but without any excess money.

"It's status quo (for gold and silver)," says Bob Haber, CEO of Haber Trilix. Haber thinks the metals are still overbought in the short term, especially silver, and that the markets will have to "work that off."

Haber points out that "as of this morning the market was expecting rate hikes next year by about 50-60 basis points." Haber will be looking to see if that expectation decreases tomorrow. "With gold going up $20 and the dollar getting hit again . . . the interpretation was that it's zero for as far as the eye can see."

Haber sees a a third round of monetary easing in the future but not immediately. "It's almost psychological," he says. Haber says when the Fed has thrown this much money at the problem and if growth weakens after QE2, "they won't have anything else to do (but) QE3."

Ben Bernanke's press conference, widely anticipated, offered no big surprise either, and gold and silver prices kept rising. Bernanke said that the Fed expects growth to slow in the U.S. in 2011 to 3.1%-3.3% while core inflation will rise to 1.3%-1.6%, below its 2% inflation mandate. The discrepancy could leave the door open to more monetary easing or, at the very least, no rate hikes.

A loose money policy winds up hurting the dollar as more greenbacks in circulation make them worth less – in turn lifting gold and silver, perceived as safer forms of money. Gold and silver don't always react inversely to the dollar, but today they will.

Mihir Dange, trader at Arbitrage, was hoping for more of a pullback in gold and said the language needed to be strong for gold to be hit with a selloff. "It's still a bullish market," Dange said, with $1,450-$1,550 as the range. Dange was flat into the Fed announcement and would reinitiate long positions if gold were to sell off.

During the first round of quantitative easing, from November 2008 to March 2010, the U.S. dollar index fell 5.11% while gold rallied 38.41% and silver popped 59.88%. Since the start of QE2 November 3rd, the U.S. dollar index is down 3.46% and gold is up 10.60% while silver has exploded 82.35%. Clearly the bulk of this movement in gold and silver has not just been dollar driven; the extra rally can be attributed to anything from fear buying to speculative trading, but a weaker dollar is an underlying theme for higher metal prices.

"No Fed action with advances of inflation is almost as bullish for silver (and gold) as having the Fed decrease rates," argues Mark Williams, author of Uncontrolled Risk: The Lessons of Lehman Brothers and How Systemic Risk Can Still Bring Down the World Financial System. 

Adam Grimes, director of tactical investments at Waverly, says he's not really paying that much attention to the Fed. "It’s very rare that the market is completely caught off guard by something like this," Grimes says.

Grimes recently sold out of his silver trades as the market volatility showed too much risk. "I would expect the earliest we would be back in would be 2-3 days to 2-3 weeks." Grimes is looking for evidence of a short-term bottom in silver. "When we look to get back in there may be more attractive opportunities in gold."

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Gold mining stocks, a risky but potentially profitable way to buy gold, rallied Wednesday, surging after Bernanke's press conference. Newmont Mining (NEM) closed up 1.9% at $58.95 and Randgold Resources (GOLD) climbed 1.6% to finish at $87.03.

Barrick Gold (ABX) gained 1.3% to $50.83 after reporting earnings today. The gold miner, who just diversified into copper, made $1.01 a share, in line with estimates and produced 1.96 million ounces of gold at cash costs of $437 an ounce. Barrick is reportedly on target to hit its full year production guidance of 7.6 to 8 million ounces.

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