Gold & Silver Tumble to 3-Month Lows on News from Fed

Following news that the Federal Reserve is ceasing its economic stimulus program known as Quantitative Easing, the gold, silver and even equity (stock) markets took a tumble.

Gold in fact dipped 4.2% to a 3-month low while silver was off by about 2% this past Wednesday, April 4th.

This announcement from the Fed is seen by many as triggering the selloff, which makes sense, at least on the surface. Essentially, the central bank says it will no longer be providing monetary stimulus to spur the economy. What is meant by monetary stimulus is literally printing money (…or adding digits on a computer). After the announcement, the U.S. dollar had a rally in relation to other world currencies.

In one sense, we could take this to be good news and a sign that a long sought after recovery is well under way.

On the other hand, it could be the old classic bait and switch.

Peter Schiff, CEO of Euro-Pacific Capital, gave an interview to King World News that basically supports the second claim.

Schiff likened the markets’ response to the Fed’s news to a knee-jerk reaction that was way off base. Although the Fed said they were ending the QE program, they also said they stand ready to re-start it at any time.

“I looked at the minutes and yes, the Fed didn’t come right out and say QE3 is coming. They are not going to do that. They are never going to do that,” explains Schiff.

The legendary investor and economic forecaster says the Fed is trying to stimulate the economy through inflation (…see our prior post on the true definition of inflation) without telling the public there’s inflation in the land.

Schiff goes on to say that we can expect interest rates to rise in the long term now that the Fed has supposedly pulled the monetary stimulus plug for now. He says the current “recovery” is a phony one built on cheap money that won’t survive without “…continuous doses of cheap money.”

Additionally, Schiff says that bond rates and the cost of borrowing for the government will rise, which is why the Fed is continuing to buy government bonds but are calling it Operation Twist rather than QE.

(So in effect, QE is still going on to some extent – it’s just being called something else)

If and when the Fed ceases buying government bonds, rates will increase and choke off the recovery built on cheap money Schiff explains.

Another famed investor, Jim Rogers, seems to think gold and silver may drop even more in the near term but overall, he remains bullish.

“I expect the price to decline and when that happens I will buy more,” explains Rogers.

We think Rogers hit the nail on the head. Price dips are great opportunities to buy more volume than you otherwise would have. If you’re in things for the long haul, temporary swings in price shouldn’t sway you.

We also agree with Schiff that monetary stimulus and cheap money are nowhere near a thing of the past. Low rates are what have prevented a full correction in the housing market and the economy as a whole. While it may be better in the long run, allowing rates to rise and a true economic correction to occur would be chaotic in the near term.

Here at Provident Metals, we always like to take the long-term view. In the end, this is what builds real wealth. While from one perspective we like those green arrows signaling gains in the markets, we also understand that we’re going to see just as many red arrows too.

If you’re taking the long view, don’t think you should bail on gold and silver. With continued financial troubles in Europe, staggering debt in the U.S. and a palpable feel of instability, gold and silver prices will inevitably reflect these realities.