Silver Leads Gold to a Strong Weekly Close
Gold is well bid going into the weekend, poised to post its third consecutive higher weekly close; with silver leading the way. The yellow metal has been underpinned by relative calm in Europe this week, amid much back slapping that the ECB's massive LTRO several weeks ago is proving to be a "game changer" after all. Additionally, many continue to believe that the Fed may be forthcoming with further accommodations — focused on the housing market — when the FOMC meets on Tuesday and Wednesday next week.
When the ECB pumped an astounding €489 bln in cheap money into the banking system late in 2011, at least initially the banks turned around and deposited it right back with the central bank. That's not exactly what the ECB had in mind and they were forced to ramp up their bond buying in the secondary market to prevent periphery yields from blowing out. This past week however, bank interest in the periphery bond market finally materialized, perhaps as a result of some arm twisting in the wake of last week's S&P downgrades. Concerns about this week's auctions proved unfounded and sovereign spreads narrowed.
So congratulations to the ECB — and the self-serving banks that are playing along — you solved the short-term funding crisis. However, the underlying debt crisis remains. The massive debt overhang, both in the periphery and in core Europe, is still there. It ain't going anywhere, amid persistent worries of a new recession and ongoing calls for austerity. The LTRO did nothing but buy some time; another kick of the can as it where. Once Europe catches up to the proverbial can again, the debt crisis may in fact be even bigger. Do they kick the can again?
In fact, another 3-year LTRO is already queued up for 29-Feb, where an even broader range of collateral is expected to be deemed acceptable. Certainly all that periphery debt bought this week will be pledgeable as collateral for even more euros at 1%. And why not? If it worked once, it'll work again... Right?
Speculation is that this next operation will make the initial €489 bln LTRO look like chump-change. How does €1 trillion (~$1.29 trillion) grab ya? So goes the market chatter.
Throw some more quantitative easing from the Fed into the mix and one might surmise that it may be about to rain fiat currency. Generally tepid inflation data this week added to the sense that the central banks do indeed have some maneuvering room. Noted Fed watcher Jon Hilsenrath of The Wall Street Journal seems to think that additional Fed accommodation wont be forthcoming next week. However, there seems to be feeling within this more dovish FOMC that "if inflation falls below 2% and shows signs of staying there, more bond purchases would be justified." If not next week, probably sooner rather than later.
Finally, take note of today's sterling performance of silver; pushing above $31 for the first time in six-weeks and extending above 31.90 as stop loss orders got run. Silver leaves the 50-day moving average in the dust. Next resistances to watch are the 100-day MA at 32.64, the high from late-Nov at 33.65 and 38.2% Fibonacci retracement of the entire collapse from 49.78 to 26.04, which comes in at 35.10. Be aware that a breakout in silver (being a more speculative metal) often precedes similar activity in gold.
Daily Silver Chart
Daily Gold Chart with Silver Overlayed 
Have a great weekend!
Peter Grant is USAGOLD's resident economist and a well-known analyst globally in the forex and precious metals markets.
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