Do Precious Metal Investors Believe QE Will Be Dialed Back?

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"While it is not politically safe for the Fed to announce new quantitative easing programs, it will need to keep interest rates low to fund government debt."

After two days of consecutive gains, gold and silver briefly dipped into the red after Fridayís job report. The Labor Departmentís monthly report said the United States economy added 227,000 (K) jobs in February, compared to expectations of 213K. Furthermore, hiring in January and December were better than previously thought. Those figures were revised to show 61K additional jobs. The economy has generated an average of 245K new jobs in each of the last three months.

Even though the unemployment rate remained unchanged at 8.3%, the U.S. dollar index, which weighs the dollar against six other fiat currencies, jumped from 79.16 to almost 80. "This is a very strong report for a host of reasons," said Eric Green, chief market economist at TD Securities. With the unemployment report giving strength to the dollar, some investors may be dialing down expectations of more quantitative easing from the Federal Reserve too soon. New reports indicate that the Fed is already discussing a new bond-buying program.

Earlier this week, the WSJ reported that "Federal Reserve officials are considering a new type of bond-buying program designed to subdue worries about future inflation if they decide to take new steps to boost the economy in the months ahead. Under the new approach, the Fed would print new money to buy long-term mortgage or treasury bonds but effectively tie up that money by borrowing it back for short periods at low rates. . .This is known as 'sterilized' QE." Just the mere mention of more bond buying was enough to send gold and silver higher, subdued inflation or not.

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Although the positive unemployment report may have added doubts to more quantitative easing from the Fed, investors are not forgetting about the current easing in the form of record low interest rates and the Fedís pledge to keep them low until 2014. When asked about another QE program, presidential candidate Dr. Ron Paul said, "When you keep interest rates at 0% essentially, isnít that a bit of quantitative easing? Itís the policy that has not changed and it's not likely to change. The whole concept is wrong, thereís a lot of credit out there being allocated by Congress and the Federal Reserve and it completely distorts the market." Paul is pleased with the improved unemployment report, but goes on to explain the he believes the improvement will be temporary and the U.S. will continue with its course of structural unemployment.

To put the job market into perspective, Heidi Shierholz, economist at the Economic Policy Institute explains, "We have 5.3 million (M) fewer jobs now than we did before the recession started, and we should also have added around 4.6M jobs over this period just to keep up with normal growth in the working-age population. Even at the quite strong average growth rate of the last three months, it would take roughly five years to get back to full employment in the labor market.Ē

Since the report about another bond-buying program on Wednesday, gold and silver have increased about 2% and 4%, respectively. The market is signaling little faith in the Fedís ability to provide sterilized QE or a reduction of current QE because of an improved unemployment report. While it is not politically safe for the Fed to announce new quantitative easing programs, it will need to keep interest rates low to fund government debt.

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Eric McWhinnie, Wall St. Cheat Sheet

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To contact the reporter on this story: Eric McWhinnie at [email protected]

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