The precious metal complex glittered last week as the Fed announced to keep interest rates at exceptionally low levels until late 2014 and indicated further monetary easing is possible. The statement and the press conference held by Chairman Ben Bernanke were dovish enough to push the US dollar lower, helping the metals to climb higher. Upbeat market sentiment pushed gold above important resistance and as we mentioned before, its long-term uptrend has probably resumed. While gold has grabbed new headlines and much of the market focus, it indeed underperformed silver which has attracted strong investment demand despite uncertain industrial outlook.

The Fed stated on January 25 that current economic conditions are likely to warrant exceptionally low levels for the policy rate at least through late 2014. Moreover, policymakers generally expected to maintain a highly accommodative stance for monetary policy. A prolonged low-rate environment is positive for gold prices. Policymakers acknowledged that global economic outlook remained highly uncertain and revised lower growth forecast over the next three years. The US dollar was pressured as a result. This, together with an unwinding of Euro-short positions in the near-term, should help push gold higher.

While gold rose +4.09% last week, silver's gain was a more lucrative +6.64%. The white metal also outperformed the yellow one if we considered only the movement after Fed's announcement. As one of the reasons pushing precious metals higher last week was speculations over QE3, a look to the price reaction during the QE2 period might help.

The Fed announced details of QE2 on November 3, 2010. However, Chairman Bernanke's speech at Jackson Hole on August 27, 2010 had triggered speculations over the issue. Let's take a look at the charts of silver price movement covering the period from August 27, 2010 and January 25.

The closing price of silver on August 27, 2010 was 19.05. Price, then, surged +30% to 24.8 on November 3, 2010. After last week's FOMC meeting, silver closed at 33.27. It may jump above 40 should the Fed announce QE3 if the size of rally is similar to that during QE2.

Net length for Comex silver futures rebounded in recent weeks but the size was still well-below that of August 2010. Net long was above 20K contracts back in August 2010 but it shrank to around 16K contracts last week. In August 2010, Comex longs began to cover following the details of QE2 in November 2010. Repeat of the situation this time would send silver price higher.

From price movements of gold and silver in 2H11, after announcement of QE2, and the recent sharp decline in gold/silver ratio, the latter would probably be a better bet for trading the QE theme.