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The Bernanke Effect on Gold Prices, Silver Prices Means Time to Buy Metals

By , Associate Editor, Money Morning •

Gold prices hit a two-month low Wednesday after the Federal Reserve indicated no new stimulus measures would be issued, and silver prices slumped to a seven-week low.

The metals fell after the Fed, led by Chairman Ben Bernanke, announced a positive outlook on the U.S. economy. The Fed reaffirmed it would hold interest rates near zero through 2014, and failed to mention any more means of stimulus.

Without more Fed steps to stimulate growth, and with more positive U.S. economic data, investors expect the dollar to strengthen which puts downward pressure on gold and silver prices.

But the long-term outlook for gold and silver is the same, and investors should instead take the Bernanke Effect as a key time to buy metals.

"This should be treated as an opportunity to buy, or if you already own but feel you don't own enough, to accumulate," said Money Morning commodities and mining expert Peter Krauth. "These two precious metals remain in a secular bull market and are integral to every investor's portfolio."

The Bernanke Effect on Gold Prices, Silver Prices

After Tuesday's Fed announcement, gold for April delivery fell $51.30, or 3%, to finish at $1,642.90 an ounce. May silver slumped $1.40, or 4.2%, to $32.18 an ounce.

The same price slip happened Feb. 29 when Bernanke told Congress that he expects U.S. economic growth this year to match or outpace the second half of 2011. That day spot gold plummeted $77.10, or 4.3%, to $1,709.90 an ounce. Silver for March delivery took a similar tumble, sliding 6.9%, to $34.58 an ounce.

The declines are a sign of fleeing investors who think gold and silver's values are directly related to the Fed's easy money policy. The Fed appears to be closing the money spigot, causing inflation-hedging investors to retreat from metals.

"The FOMC, plus the Bernanke statement, plus the good data are wringing QE3 out of the market and the extra QE3 premium built into gold," James Steel, chief commodity analyst at HSBC, told Reuters.

Gold and silver have been behaving like safe-haven assets in the weeks when the Fed releases statements on the economy.

But there are still plenty of investors who have bet on a bullish metals market. About $2.2 billion has poured into the SPDR Gold Trust ETF (NYSE: GLD) this year, according to XTF.com.

Famed hedge-fund manager John Paulson is among those betting big on gold. Paulson's holdings in GLD make his firm the biggest stakeholder in this ETF, with a position currently valued at $2.9 billion. And recent filings showed that another legendary hedge-fund investor, George Soros, has nearly doubled his stake in GLD to 85,450 shares.

"None of the fundamentals supporting gold have gone away," Krauth said earlier this year. "Instead, they've only become even more entrenched."

Gold finished its 11th straight year of gains in 2011, and should keep going in 2012.

Time to Buy Metals - Copper, Too

Copper also fell Tuesday thanks to the Fed, slipping 5 cents to finish at $3.85 per pound.

Copper rose today (Thursday) on news that economic activity in the United States, the world's second-largest copper consumer, will support higher copper demand this year.

The Philadelphia Fed economic index rose to 12.5 this month, up from 10.2 in February.
The New York Fed index also rose to 20.2, from19.5 in February. Both measures indicate U.S. manufacturing growth, which should continue as companies rebuild inventories and invest in new equipment.

Investors also should expect rising copper prices this year due to high demand from China and emerging markets and limited supply.

In fact, news this week out of Chile shed more light on how mining issues could push copper prices higher. Declining ore quality at aging mines caused Chile's copper production in January to fall 8% from the year before and a staggering 20% from December.

"China's restocking came faster than expected and perhaps it will slow now," José Pedro Fuenzalida, senior analyst at LarrainVial in Santiago, told The Financial Times. "But the production is so disappointing, it will be extremely supportive for the market balance."

And it's not just copper prices that will climb due to supply issues.

Soon virtually every substance vital to modern life will become enormously expensive and profitable for investors who know how to play it.

As Peter Krauth explains in his latest report, "today's scarcity and soaring costs could spur the biggest investment gains in history."

To read Peter's latest free report click here.

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