Gold surged to a five-month high on Friday in the wake of comments by Federal Reserve Chairman Ben Bernanke in Jackson Hole, Wyoming that indicated the Fed is open to more monetary stimulus. Speaking at a symposium held by the Federal Reserve Bank of Kansas City, Bernanke noted the slow pace of the recovery, saying that “the economic situation is far from satisfactory.” He called the improvements in the unemployment figures “painfully slow,” and warned, “Unless the economy begins to grow more quickly than it has recently, the unemployment rate is likely to remain far above levels consistent with maximum employment for some time.”
Bernanke very much left the door open for a third round of quantitative easing, concluding his remarks by noting that “Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”
The initial market reaction seemed to be one of disappointment, as equities fell from their morning highs immediately after it was recognized that the Fed was standing pat for now. But as traders digested the longer term implications of Bernanke’s remarks, stocks rebounded, recouping most of the gains that had been lost shortly after 10am. Commodities reacted in a similar fashion, as crude oil was up nearly 2%.
The big winners were gold and silver. Gold rose $37 to $1,692 per ounce, while silver skyrocketed nearly 4.5% to $31.73 per ounce.
Gold spiked shortly after Bernanke's comments were released after an initial drop.
Traders also bought the dip in silver shortly after 10am.
Meanwhile, Bernanke's speech placed downward pressure on treasury yields. While stocks finished lower than their session highs after the Fed chair’s comments, U.S. bond yields sunk, with the 10-year note dropping to 1.55% from its session high of 1.657% -- a 5% swing.
Today, Bernanke made clear that the Fed is willing to intervene via QE3, but there is no doubt he wants to avoid this at all costs. This is an election year after all, and the White House will be reluctant to sanction another large round of asset purchases by the central bank, as it would be seen as an admission by the White House that the economy is in dire straits.
Bernanke’s comments were no doubt intended to ease concerns that the Fed would stand on the sidelines as unemployment continues to remain high and the Euro zone crisis rages on. The Fed says it is ready to provide more liquidity to the financial sector "as needed," but the threshold for such intervention remains unclear. For now the Fed is hoping that investors will trust that the Fed will take action if necessary, and that this will be enough to accelerate the pace of the recovery.
If QE3 comes it will not be announced before the presidential election, as such a move could be spell the end of the Obama presidency.