FED WORRIES ABOUT LONG-TERM INFLATION RISK

Gold and silver are both trading near unchanged, in spite of the fact that the dollar is up 8 basis points and oil is down $.30. Equities are higher with the Dow up 43 points in early trading. Dow Jones reported that overseas consumer buying offset pressure from the rebounding dollar. The fact that there are signs that the economy may be recovering should be considered positive for the gold market. As the economy recovers, the enormous amount of fiscal stimulus that has been created should be a factor to increase inflation pressures, thereby prompting more demand for gold.

Analysts told the Dow Jones Wire Service that there has been bargain buying of physical gold and some suggestion that jewelry demand in Asia may be picking up as the market enters a seasonally strong period, according to Standard Bank analyst Walter DeWet. Moreover, European consumer confidence rose from an 11-month high. Consumer confidence in the U.S. slipped slightly. The current employment situation seems to be a key factor in those numbers as an increasing percentage thought that jobs were hard to get.

The FDIC is seeing so many bank bailouts that they have been forced to try to raise more money to replenish their depleting fund. They moved today to raise $45 billion by having banks prepay their premiums for three years. This is a radical move and it came as "condition of the U.S. banking industry continues to deteriorate," said Dow Jones Wire Service. They also said, "The number of problem banks and assets has increased rather significantly in recent months, increasing the FDIC's estimated cost of bank failures to $100 billion from $70 billion from 2009 through 2013." The FDIC tried to reassure the markets that they have plenty of cash on hand for now with roughly $22 billion in liquid assets as of June 30. However, by next year they may need a significant amount of additional funding for the additional banks that will be failing.

At the beginning of October there will be a week-long holiday in China. This, according to a Dow Jones Report is affecting the copper market. Chinese copper buyers may be absent from the market. This could also be affecting the precious metals to some extent, as declining commodities in general would put some pressure on that market. However, this would likely be a temporary situation. Richard Fisher, president of the Federal Reserve Bank of Dallas said the Fed would need to be vigilant towards the long-term inflation risk. He told Dow Jones Wire Service, "As to the long-term dangers of inflation posed by the expansion of the Federal Reserves balance sheet, I remain ever vigilant."

The latest Case Schiller home price index indicates a tentative turn around in the U.S. housing market. The index showed rising home prices in 18 of the 20 metropolitan areas in July versus June. David Blitzer, chairman of the S&P's index committee told Dow Jones Wire Service, "Home prices seem to be improving,with some market areas sustaining the positive momentum." Once again, this would be indicating that future inflation risks may be rising. Moreover,in the first four weeks of September U.S. national chain store sales rose 4%. All of these factors are certainly green shoots that suggest economic recovery may not be too far off. However, unemployment and other areas of economic activity may continue to be stressed to some degree.

In this environment many investors chose to own gold. Funds have substantially increased their net long position. Therefore, any dip maybe viewed by analysts as a buying opportunity. This is particularly true if the December gold futures hold above the $990 level. This level has been tested several times in the last week and as it continues to hold it should be viewed as a positive signal for the markets.

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