The Direction of Silver Prices Before QE Forever

The price of silver has moved up from $27.50 seen just a week ago to stage a test of the $31.00 level. Although technical traders may consider this market currently over bought, the fact remains that a bull market can stay over bought for quite a long time. It will be interesting to look back on this rally that began in the wake of the Financial Times’ story about the CFTC’s lack of evidence and impending conclusion of its four year study into manipulation of the silver market. As it stands, the big shorts remain active by virtue of the declining open interest.If this rally is sustainable, then the shorts seem to continue hoping they can cover at lower prices. Unless, of course, they are simply handling customer business that can readily stomach the paper losses. What this implies for silver in the short term is anyone’s guess, as the world waits for the next coordinated monetary policy intervention that will largely determine silver’s longer term prospects. Fed Hints at More QE to Come Perhaps the most important driving factor for silver is that Fed policymakers are no longer talking about an exit strategy. They just talk about scope, room for more easing and new ideas for easing. Also, when will Japan intervene again? One especially interesting indicator of monetary stimulus is the amount of Federal Reserve Credit outstanding. At the end of 1990, this amount was just $291 billion, but during the 91/92 recession, it rose to $342 billion over two years. Another substantial credit expansion of $35 billion occurred in 1998, and again in 1999 as Y2K approached, leading to a record $108 billion rise for that year. The recessionary 2001/02 period then saw Fed Credit grows by $120 billion, leaving the total at $747 billion. Nevertheless, the Federal Reserve then permitted a massive credit rise of $1.36 trillion in 2008 in response to the financial crisis, leaving Fed Credit at $2.247 trillion by the end of that year. Perpetual QE on the Horizon? The Fed now seems to be floating a trial balloon for the concept of perpetual quantitative easing. Remember how Operation Twist gradually evolved into ‘bond sterilization’? Although there does not yet seem to be enough political will for more easing, if the new easing program can be made perpetual or recurring, it could provide a much-needed boost for the paper currency Ponzi scheme, while also lulling the masses by making QE seem normal and harmless. Another brilliant solution by the masters of perception! In the Reuters article, "Fed mulls open season on bond buys to help economy”, the following passage clearly broaches the touchy subject of an open-ended QE program: The Federal Reserve is considering a new approach to unconventional monetary policy that would give it more leeway to tailor the scale of its stimulus to changing economic winds.While fresh measures are not assured and the timing of any potential moves are still in question, some officials have said any new bond buying, or quantitative easing, could be open-ended, meaning it would not be bound by a fixed amount or time frame."I am inclined to think that if the Fed decides on more QE it would be of the open-ended variety," said Michael Feroli, chief U.S. economist at JPMorgan and a former Fed economist. Contagious Money Printing Mentality Makes Inflation Virtually Inevitable This worrying trend is not just seen in the United States. According to financial pundits, especially those located outside Europe, what the German court has to agree to so that the European Central Bank or ECB can start acting like a “real” central bank is really quite simple. One New York based banking analyst summed it up like this: “Policy makers should empower the ECB to rescue banks,create a deposit insurance program and allow it to print money, like the Federal Reserve.” All in all, this trend toward dilution of the value of paper currencies managed by central banks that permit an ongoing expansion of the money supply remains supportive of higher nominal prices for silver and other physical commodities as inflation appears virtually inevitable and endemic. Furthermore, silver remains good value as one of the few hard assets still trading well below its inflation-adjusted highs. Even though silver’s price discovery mechanism remains dominated by a net and highly concentrated short position that commands almost half a year of global production, its future looks bright.