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The Federal Reserve does not directly comment on gold and silver. But for the first time in the living memory, the Fed sent a clear signal in a message about interest rates to sell them both.
However, market participants did not listen and ran the two up. After the 12:30 pm EST announcement from the Fed, the SPDR Gold Trust ETF GLD +0.23% and iShares Silver Trust SLV +0.25% , the Market Vectors Gold Miners ETF GDX +0.72% and popular miner stocks such as Newmont Mining Corp. NEM +4.82% , Barrick Gold Corp. ABX +0.02% and Silver Wheaton Corp. SLW +7.99% saw explosive buying.
Famed investor Benjamin Graham said that in the short term the market is a voting machine, but in the long term it is a weighing machine. In other words, in the short run, gold and silver moved based on the prevailing consensus opinion, but in the long run, the true value of gold and silver will be reflected in their prices.
After the 12:30 pm Fed announcement, gurus were out in full force recommending aggressively buying gold and silver.
"Fed Promises Exceptionally High Inflation For Three More Years," shouted the headline from a well circulated newsletter.
Previously, the Fed statement promised exceptionally low interest rates until mid-2013. In the 12:30 pm statement, the Fed said that it expects exceptionally low interest rates until late 2014.
The Fed action amounts to QE2.5 (Quantitative Easing).
The Fed move was interpreted as inflationary and it made sense for gold and silver to spike.
In other words, the Treasury's printing presses will run harder and longer. Up to this point, gurus and investors were right in running gold and silver up.
However everything changed when the Fed provided more information later in the afternoon. For the first time in my memory, the Fed said that it will use 2% as an inflation target. The Fed also said that it was not targeting any specific unemployment number.
Both of the foregoing statements are very negative for gold and silver. The Fed gave us a clear signal to sell gold and silver, but nobody listened.
In simpler words, the Fed stated that it will destroy 2% of the value of the U.S. dollar every year and no more.
If the markets were logical, the interpretation would have been that gold and silver should go up 2% every year to compensate for the loss in the value of the dollar.
Why did gurus and investors not listen to the clear message from the Fed? The answer lies in the fact that most investors are inductive in their thinking. Being an inductive thinker means being able to think only contiguous to the present state and within the boundaries of conditioning of the brain by recent events.
Investors are conditioned by the first QE and QE2. In both cases, gold and silver ran. But the prior cases were different from the present case because the Fed did not have an inflation target and it was widely believed that Fed was targeting a certain unemployment rate.
This time it is different, the Fed has committed to an inflation target of 2%. The Fed has also made it clear that it is not targeting a low unemployment rate.
Since investors as a group are highly inductive, as shown in the diagram, it is difficult for them to quickly adjust to the new information from the Fed.
As Benjamin Graham said, in the very short term voting on gold and silver may continue on the upside. Sooner or later, investors will realize that they did not fully understand today's information from the Federal Reserve leading to a fall in gold and silver.
The models at The Arora Report are adaptive in nature, i.e., that is that they change automatically with market conditions. The conclusion of these models is that today's announcements from the Fed are not positive in the long term for gold and silver.
The Federal Reserve on gold and silver - MarketWatch