Gold and Silver Poised for Biggest Weekly Gain of 2011

by Peter A. Grant

February 18, a.m.
(from USAGOLD.com) --

Gold extended to a new 5-week high and silver surged to new 31-year highs above $32.00 in early trading on Friday. Rising inflation worries and elevated political tensions in the Middle East have been the primary catalysts for this week's solid gains. Both gold and silver appear poised to notch their biggest weekly gains so far this year.

The G20 has commenced their latest meeting, planning once again to address "global imbalances." It was widely believed that inflation would be high on the agenda as well, but CNBC reported: "What became clear following the second history lesson of the afternoon was that no one was going to discuss the big issue of inflation." Maybe if we put our heads in the sand and don't acknowledge rising price risks, they'll go away. With an attitude like that, it is almost assured that this G20 will not produce any meaningful results.

One of those "history lessons" mentioned was delivered by none-other than Professor Ben Bernanke, formerly of Stanford, NYU and Princeton, now Chairman of the Fed. He boiled the global imbalances issue down to capital flows stemming from different growth rates between emerging and advanced economies. Simple remedy really; the emerging economies need to save less and consume more, while advanced economies need to save more and consume less. I'm sure the crowd -- wise to the realities of Fed monetary policy -- leaned forward in anticipation of the punch-line, but it was not forthcoming. Maybe Mr. Bernanke was simply hopeful that nobody would catch the contradiction. Clearly the zero interest rate policy of Bernanke's Fed is designed to discourage saving and encourage consumption. What's the real lesson here professor?

Bernanke paid a brief homage to inflation, saying that the surge in global commodities prices was the result of strong demand from China and other fast-growing countries. He ignores the reality that the massive boost to liquidity from the Fed's quantitative easing efforts is finding its way into commodity funds, ETFs and physicals as investors seek yield in a zero interest rate environment and seek to hedge against the inflation that everyone seems to realize is already here.

In just the latest reality check, German PPI jumped to a 5.7% y/y pace in Jan, higher than the market was expecting. German's are historically very sensitive to inflation. The defining moment in German economic history is the nightmare inflation that erupted between the two World Wars. The latest PPI print is likely to make Germany push-back even harder against ongoing loose ECB policy and various efforts to create a permanent EU bailout facility. That does not bode well for what is increasingly looking like a deteriorating situation in Europe.

On Thursday we saw ECB emergency overnight lending spike to EUR15 bln. As overnight lending had been running around a mere EUR1 bln per day, there was some speculation that the surge might have simply been a refi tender mistake and that it would wash the next day. The next day, overnight emergency lending remained elevated, increasing to EU16 bln. There is still talk of an error today, primarily because yields in the overnight market are not indicative of any particular stress. However, there is simultaneously an increased sense that some EU member state may be in trouble. The likely candidates are probably pretty obvious, but Portugal is probably the front runner, given recent German pressure on the country to request a bailout. The ECB has reportedly been buying Portuguese government bonds today as well.

Peter Grant is USAGOLD's resident economist and a well-known analyst globally in the forex and precious metals markets.

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