Silver price hot streak continues

The silver price streaked higher yesterday, with Comex silver for delivery in March gaining 4.6% to settle at $37.14 per troy ounce – the highest settlement price since September. Gains in the gold price were more modest, with gold for April delivery up 0.8% to $1,788.40, but nevertheless, this is above resistance at $1,780, and offers gold a good shot at running up to and perhaps besting the $1,800 mark. As MarketWatch reports, platinum and palladium also joined the party, with March palladium gaining 2.1% to settle at $719.75, and April platinum up 0.5% to $1,723.50.

As has been the dominant market trend of late, equities rode higher together with precious metal prices, the Dow closing above the psychologically important 13,000-level at 13,005.12. This is the Dow’s highest closing price since May 19 2008. Commodities as a whole also gained, though crude oil prices declined for the second day in a row. As is typical on a “risk on” day, the dollar fell against the euro and other major currencies, with the Dollar Index down 0.38% to close at 78.27. However, yields on longer-maturity US Treasuries continued to fall – contrary to what one would expect in an environment where inflation concerns are growing. Looks like we’ll have to wait a little while longer for the “Bond apocalypse” that Peter Schiff and others have been warning about.

This morning’s major market news has been the European Central Bank’s new package of cheap (1%) loans to eurozone banks, with 800 banks borrowing a total of €529.5 billion from the ECB. This second “long-term refinancing operation” (LTRO2) is bigger than December’s LTRO1, which saw 523 banks borrowing a total of €489bn. This is all being done for much the same reasons that other central banks print money – in an effort to solidify the banking system, prevent deflation, and encourage banks to continue lending money to governments. European stocks have responded positively to this news, as have commodities.

Though Bank of England governor Mervyn King has said that the BoE’s QE programmes are “equivalent” to LTRO, the QE programmes practiced in the UK and USA are a more direct and honest form of debt monetisation. QE is when the central bank directly purchases government bonds from private holders. These private entities thus receive newly created electronic cash deposits in exchange for selling bonds to the central bank.

In contrast – no doubt to placate the Germans – LTRO funding is in the form of loans of supposedly limited duration (three years). This begs the question though of how European banks are going to be able to repay €1 trillion+ of loans in three-years time without causing a serious contraction in lending, and thus more economic problems for the eurozone. As Roubini Global Economics economist Megan Greene tweeted a short while ago: “The ECB is stuck now. They'll have to do it again in 3 yrs. We'll be talking about LTRO v28 by then.” Similarly, The Wall Street Journal’s Alen Mattich tweeted: “So how exactly will Europe's banks replace the EUR1 trln(sic) of ECB funding in three years' time. Or is 3 years the ECB's way of saying forever?”