Gold, Silver Prices Pop as Fed Hints at QE3

NEW YORK (TheStreet ) -- Gold and silver prices were soaring late Tuesday as the Federal Reserve admitted it had contemplated pumping more money into the financial system at its last FOMC meeting.

An after hours $20 rally wasn't even the brightest spot for gold. Prices settled at a record, up $13.10 at $1,562.30, narrowly beating out May 2nd's record of $1,557.10 an ounce. The gold price has traded as high as $1,556.10 and as low as $1,541.10 but has popped to as high as $1,574 an ounce in after hours trading, a stone throws away from its old high of $1,577. The spot gold price was up $15.50, according to Kitco's gold index.

Silver prices actually ended the day down 6 cents at $35.63 an ounce. but have since joined gold in its furious rally up 54 cents to $36.24 in after hours trading. The U.S. dollar index was down 0.12% at $75.82 and the euro was down slightly against the dollar.

Gold and silver had been caught between opposing forces Tuesday. Gold was still a safe haven asset of choice along with the U.S. dollar and U.S. bonds, but gains had been relatively muted as some investors opted for profits and others stayed out of the market altogether.

Silver, on the other hand, typically a go-to metal like gold, had been suffering from the industrial metal blues. As investors worry about a global slowdown, flat or negative demand from Europe and the U.S., and credit tightening in emerging market countries -- typically voracious consumers of industrial metals -- silver had become less appealing.

The situation changed the moment the Federal Reserve released its FOMC minutes mid-afternoon. Some members said that if the unemployment rate stayed high and if inflation fell to low levels, "it would be appropriate to provide additional monetary policy accommodation."

The Fed finished its second round of quantitative easing at the end of June and markets had given up on the possibility for more cash. Interest rates are still low and the Fed has yet to actually start tightening and is currently reinvesting money from interest payments and maturing bonds back into the Treasury market.

Not all members were jumping on the QE3 bandwagon, however. Others cited an increased risk of inflation that might actually force the Fed's hand in draining money out of the market. The Fed will meet again on August 9th.

More free money in the system is a perfect backdrop for higher gold and silver prices as the U.S. dollar loses value. The U.S. dollar index had started to reverse two-days of gains after the release. Investors buy gold and silver as protection against weak currencies and traders have been waiting for momentum to jump back into the market.

Mihir Dange, co-founder of Arbitrage, says "look for a breakout above $1,577" but thinks trading could be choppy between $1,560 and $1,577. Despite the tantalizing QE3 prospect from the Fed, there are still a lot of variables for gold and silver. "We're still waiting on a lot of events," says Dange referring to Washington's failed attempt over the weekend to resolve the debt ceiling as well as Europe's inability to help Greece or prevent contagion. These events "could push the market one way or another."

Silver is finally shaking itself out of the summer doldrums but Anthony Neglia, president of Tower Trading, says that "[silver has] had a difficult time staying above $37."

Worries about silver and its vulnerability as an industrial metal reverberated throughout the market, particularly after China raised rates last week, the third time this year. The higher the rates are, the less money companies can borrow, and the more likely spending will slow.

Neglia also says that safe haven buyers were burned during silver's parabolic rise during March and April, which might make them more hesitant to jump back into the metal. "It did some damage and I think people are scared to get in at these levels."

However, data released today showed that new loan growth in China grew 3.3% year-over-year in June andAlcoa(AA)'s CEO, Klaus Kleinfeld in the company's latest earnings report, indicated that China would grow 5%-8% in 2011. This figure is significantly lower than its 9.7% growth rate in the first quarter, and the 10.3% for 2010, but still reflects growth.

Gold mining stocks were popping. Kinross Gold(KGC) was up 3% to $16.81 while Yamana Gold(AUY) was up 3.29% at $12.87. Other gold stocks, Agnico-Eagle(AEM) and Eldorado Gold(EGO)were trading at $64.49 and $16.62, respectively.