Parallel Dimensions: An Update for the Precious Metals
By Joshua Enomoto, Founder of and contributor
Let’s face the immediate facts: the precious metals market has turned yet another ugly corner in a ghetto full of ugly corners. While we have seen this sector pull away from the brink of disaster, is another miracle upon us? Ultimately, the long-term answer is optimistic for the entire commodities sector but we also need to acknowledge that within a secular bull market, there will be periods of short to intermediate term weakness.

Much of the meteoric rise of gold to $1,900 was based on pure monetary policy, otherwise known as letting the printing press operate at full blast. And why not? Federal Reserve Chairman Ben Bernanke is a notorious Keynesian economist and his dissertation regarding the Great Depression and fiscal illiquidity is referenced both in academia and pop culture. It would have been a contradiction of the highest order for him to squeeze the monetary base during the financial collapse of 2008, at a time when the entire nation was teetering off a very precarious ledge. Of course, Mr. Bernanke was all too happy to oblige, firing off inflationary programs euphemistically labeled “Quantitative Easing.” The first two editions took both the equities sector and the precious metals soaring, which was the whole point of the matter. According to the Keynesian perspective, a financial disaster can be averted through the pumping of liquidity, which in turn would theoretically induce confidence in the markets. Higher gold prices just came with the deal.

While monetary discourse will always draw heated debates, it could be argued that QE1 and QE2 accomplished their objectives: banks confirmed excess reserves on their books and the national money supply, which was contracting for much of 2009 and 2010, went from moderate growth to rapid growth in the summer of 2011, as evidenced by gold’s parabolic run. At that time, many saw no need for further easing programs, as the return on investment would exponentially decline and economic activity would not be substantially stimulated.
Yet here we are again, only a few months removed from an official QE3 and a de-facto QE4. Those that have argued in the past that further quantitative easing would have little effect were proven right from a short-term perspective:

The above is the 1-year daily chart for gold bullion, layered in with the US Dollar index. As you can see, for much of the past year, gold and the dollar shared an inverse relationship: as one went up, the other went down, as has been the case throughout much of the current commodities bull market. However, a strange occurrence developed in November, when gold and the greenback began to share a corollary relationship. This was evidenced most recently on Friday’s (Jan 25) market session, when both assets tanked.
As expected, silver began to show the same odd correlation with the dollar:

Of course, noted gold bears and “johnny-come-latelys” have swung with full force, claiming that further issuances of QE are suffering from a declining rate of return and that this will be the end of the precious metals bull market. While I agree that QE3 and “QE4” have been a disappointment for gold and silver, talks of the bull market’s demise have always been premature and will likely be premature again.

First, not all precious metals have been affected negatively:

Palladium is regarded as one of the more obscure precious metals and is heavily demanded by the automotive industry. Since late November, as the dollar weakened from “QE4,” the other white metal began a steep challenge of the $700 level, eventually overcoming it and closing just south of the $740 mark. It too had a moment of direct correlation with the greenback which lasted for roughly a month and a half: this confirms that mere correlation with the dollar is not necessarily bearish and could lead to greater gains.

Second, we have to consider that other sectors, most notably the S&P500, benefitted dramatically from Bernanke’s most recent monetary exploits from a nominal perspective, yet the market participation has been on a noticeable decline. This brings up the specter that current record highs in the equities are merely psychological speculation towards a monetarily supportive Fed; an assumption that may bring about unintended consequences.

For now, we have to acknowledge the facts: the metals have lost some near-term momentum and that usually brings the bears out of hibernation. Yet at some point, the precious metals will unhinge themselves from its current corollary relationship with the dollar and will eventually begin another challenge upwards.