Clues from Ben Bernanke’s Speech Continue to Fuel Markets

The Dow (NYSE:DIA) has surged nearly 400 points in the past two trading days as the markets weigh what Ben Bernanke said at the annual Jackson Hole Conference.  Although many analysts were expecting forms of stimulus to be announced, Bernanke made no such annoucement.  However, there were clues in his speech that appear to be fueling the markets.

Ben Bernanke starts by reminding listeners how we got to the point where we are today.  He says, “The freezing of credit, the sharp drops in asset prices, dysfunction in financial markets, and the resulting blows to confidence sent global production and trade into free fall in late 2008 and ealry 2009.” Although Bernanke believes the banking system is generally much healthier now, investors have been reminded in recent days that the banking system is still on life support.  Bank of America (NYSE:BAC) received a $5 billion bailout from Warren Buffett, and sold half of its China Construction Bank position to raise another $8 billion.  This is alarming coming from America’s largest consumer bank, which continues to raise capital after it said it was well capitalized.  Bernanke also goes on to explain that “It is clear that the recovery from the crisis has been much less robust than we had hoped.”

The Fed Chariman also makes it clear the Fed is keeping an eye on the rest of the globe.  He said, “The Federal Reserve continues to monitor developments in financial markets and institutions closely and is in frequent contact with policymakers in Europe and elsewhere.” This was clearly evident last week as news broke the Fed provided $200 million in loans to Swiss National Bank.  Ben Bernanke once again claims the Fed has a range of tools that could be used to provide additional stimulus.  A sign that Bernanke is willing to use these tools comes from the extension of the next FOMC meeting in September.  The meeting has been extended an extra day to allow for a fuller discussion of the Fed tools.

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Ben Bernanke’s speech also laid the groundwork for President Obama’s job annoucement on September 5th.  He says, “Notwithstanding this observation, which adds urgency to the need to achieve a cyclical recovery in employment, most of the economic policies that support robust economic growth in the long run are outside the province of the central bank.” Bernanke goes on to say, “Fiscal policymakers can also promote stronger economic performance through the design of tax policies and spending programs.”  These two statements appear to be a direct cry for help from Bernanke to Washington. Bernanke also warns of the games Washington played with the debt ceiling.  He said, “The negotiations that took place over the summer disrupted financial markets and probably the economy as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses.”  Russia (NYSE:RSX) is a clear example of this as the nation continues to reduce U.S. Treasury holdings and increase its gold (NYSE:GLD) reserves.

Although Bernanke did not officialy announce a new stimulus package, his speech was the opening act of what is to come in September.  His cry for help to Washington will most likely be answered from President Obama’s major annoucement on September 5.  After President Obama’s annoucement, Ben Bernanke steps up to the plate on September 20-21.  Investors wondering if Bernanke will actually provide more stimulus or not should consider the last sentence in his speech.  He says, “The Federal Reserve will certainly do all that it can to help resotre high rates of growth and employment in a context of price stability.” Historically, this means the Fed will continue to devalue the dollar to support asset prices.

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Disclosure: No positions.