With the massive drops recently in gold, silver, hogs, and even corn since Sunday night, the rising fear of deflation in many commodities is lending more credence to a QE3 type program being instituted by the Fed after QE2 finishes in June.
The biggest fear by the Federal Reserve is deflation, as it would force interest rates up on government debt and treasury purchases, and make rotating existing debt too expensive to undertake. The flip side of the argument is that the continuance of their current monetary policy and the expansion of the money supply is causing the dollar to drop and enter crisis territory.
Unfortunately, the recent manipulation by the regulators to control commodities using raised margin requirements is causing many to dump their positions, and head for the doors, which is facilitating the escalating fall in commoditiy prices.
And so the overly expected “deflationary” wave takes hold, just in time for silver to take out the $40 support. Next up: everyone runs to the exits over fears that despite nothing having changed, deflation is gripping the land, which, of course, is precisely what the uberprinter needs in order to get QE3 approval. In the meantime, weak hands should certainly hit those bids. While that is happening, we eagerly await to see to what record low Comex registered silver drops today, not to mention seeing InTrade odds on whether QE3 will come in August or November… – Zerohedge
For holders of physical commodities, as well as those with long term positions in the metals, oil, and food futures, the importance here is to be patient, and ride the temporary spike down. Great investors such as Warren Buffett made their fortunes by being contrary to the markets, and this is a very accurate axiom with the recent slide in precious metals. The fundamentals on the dollar and on silver and gold have not changed, only the regulatory landscape has, and was instituted to protect the major banks who are currently shorting both gold and silver.
The Federal Reserve needs to find a way to justify a QE3 program, and temporary deflation in commodities is the perfect avenue to use. With most traders worried that commodities are a bubble, not a result of prices due to a falling dollar, the ability to collapse those commodities in the short term was fairly easy to accomplish by the banks and regulators, but in the end the Fed’s direction is still on course to hyperinflate or die.