Gold & Silver Drop as QE3 on Back Burner

Federal Reserve chairman Ben Bernanke gave no indication that the Fed would loosen monetary policy in the near term.

Today, the U.S. Commerce Department said the economy grew at a slightly faster pace in the final three months of last year. It expanded at a 3.0 percent annual rate from October to December, the fastest pace since the spring of 2010. The data was slightly ahead of estimates and a full 1.2 percent better that the numbers from the third quarter of 2011. Manufacturing activity in the U.S. Midwest, a widely-watched index, also beat expectations.

In response, gold bullion is down $60.95 to $1,727.45 an ounce as many felt the bullish data out of the United States reduces the risk of inflation. Silver is also down sharply to $35.25 giving up $1.95 so far on the day. Some feel that with the positive news the U.S. Federal Reserve may not embark upon another round of quantitative easing. The general feeling, before today, was the Fed might ultimately be forced to implement QE3 and print more money to buy-up government bonds.

Federal Reserve chairman, Ben Bernanke, focused on “positive developments” in the labor market during the first day of his semi-annual monetary policy report to Congress. He gave no signal that the central bank is considering additional measures to spur the economy using monetary policy.

“I think the fact that they’re not going to have to come in with QE3 means there is good economic growth in the U.S. (and) means they’re not going to ram money into the process, which is inflationary and good for gold,” said Chris King, portfolio manager at Morgan, Meighen and Associates.

Lawrence Creatura took a more cautious approach to Bernanke’s address. Mr. Creatura, a New York fund manager at Federated Investors Inc., notes, “The economy is gradually putting one foot in front of the other. The one question that’s coming up is the impact of higher oil prices. If energy prices remain where they are or increase, that will have a negative impact on future economic data.”

Gold and silver equities are taking it on the chin today. Junior gold exploration and development company NovaGold Resources (Stock Profile – TSX:NG & AMEX:NG) is currently down 5.5%. The company’s flag-ship project, Donlin Gold, is expected to produce 750,000 ounces of gold annually for the company, with cash costs estimated at US$409 per ounce. Donlin Gold contains 39 million ounces (Measured & Indicated) at an average grade of 2.1 grams per tonne. The Donlin Gold project is under joint ownership with Barrick Gold (Stock Profile – TSX:ABX & NYSE:ABX).

Scorpio Gold (Stock Profile – TSXV:SGN), another junior gold exploration and development company, is also leading the decliners today. The company is advancing the Mineral Ridge Gold operation in Esmeralda County, Nevada with aims of joining the ranks of junior gold producers. Shares of Scorpio Gold are currently down 3.8 percent today trading at $1.00 per share.

Shares of junior gold miner Nevsun Resources (Stock Profile – TSX:NSU & AMEX:NSU) are also down sharply today slipping below the $4.00 mark. Earlier this month, the company announced lower than expected production guidance for its Bisha mine in Eritrea. The announcement sent shares tumbling from $6.30 to $4.40 and resulted in some, including TD Securities analyst Steven Green, to question Nevsun’s resource model from March, 2011.

Silver miners are also leading the daily decliners this morning. Endeavour Silver (Stock Profile – TSX:EDR & NYSE:EXK), Orko Silver (Stock Profile – TSXV:OK), and US Silver (Stock Profile – TSX:USA & OTCQX:USSID) are down 5.8 percent, 5.8 percent and 5.6 percent respectively on the heels of Bernanke’s report.

Mike Luft

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