Bernanke Raises Hopes

Gold and silver prices surged on Friday, as Federal Reserve Chairman Ben Bernanke launched a spirited defence of the Fed’s quantitative easing efforts at his Jackson Hole symposium speech. Though he did not announce an actual timetable for new monetary stimulus measures – he wouldn’t have wanted to front run his other colleagues on the Open Market Committee – Bernanke left traders confident that new easing measures will be announced at the conclusion of the next two-day FOMC meeting on September 13.

December Comex gold, the most actively traded contract, gained 1.8% on the day ($30.50) to settle at $1,687.60/oz – a five-month high. In after hours trading gold extended its gains, nosing above the $1,690 mark. It now looks well positioned to break back above $1,700.

Front-month silver gained around 3.3%, and is now trading comfortably north of $31.50 (though a lot can happen in silver very quickly, which means what’s comfortable one moment very quickly turns uncomfortable). Stocks and the broader commodity complex also rallied, with the S&P500 gaining 0.5%, while WTI crude gained 0.26% over the course of the week. Unsurprisingly given the dollar-bearish tenor of Bernanke’s comments, the Dollar Index lost 0.59% to settle at 81.21.

“Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labour market conditions in a context of price stability” was the part of the Fed chairman’s speech that most titillated the market. As John Mauldin comments, this formulation is remarkably similar to comments from Bernanke at Jackson Hole two years ago, just before the Fed embarked upon QE2.

“Lather, rinse, repeat” as the old saying goes. The problem (one of many), as we’ve discussed before, is the law of diminishing returns associated with money printing: the more you do it, the bigger and bigger the stimulus doses have to get in order just to achieve the same “high” as last time. The more central banks resort to this, the more painful the inevitable economic correction, which makes going “cold turkey” on the money printing even more difficult.