Gold (NYSEARCA:GLD) has benefited enormously over the last five years from inflation produced by Fed policy, and more so from increased inflation expectations. Cash for clunkers and other real stimulus programs implemented through early 2010 directly increased money in circulation.
QE3 and recently announced QE-6.5%, however, do no such thing. Without "Helicopter Ben" Bernanke getting literal and dropping bundles of Benjamins out of the sky, precious metals appear to have begun a leg downward that has room to run. Retail precious metals investors are "all in" after recently announced easing measures, and central bank purchases alone cannot sustain current prices with production at all-time highs.
If economic growth is desired by policy makers, aggressive stimulatory programs will be implemented eventually. These policies will require eliminating the debt ceiling and do not seem likely in the near future, given the Republican stance and gridlock in Washington, D.C. The economy is stagnating and the productive power of the U.S. dollar is waning; however, markets are too confident to ask for the medicine that will lead to precious metals' greatest run.
Gold and silver (NYSEARCA:SLV) prices are down significantly since markets got manic in April and August 2011. Few weak hands have been shaken out, however, aside from leveraged players and low-conviction buyers of silver in the $40-plus range. As discussed on Dec. 13 in the opening minutes of CNBC's Fast Money with regard to overall markets, a "flush" -- or sharp move lower -- of weak hands is generally needed for prices to accelerate to the upside. With a flush first comes panic selling and momentum short-selling, the capitulation of which leads to a short squeeze and panic buying.
Gold and silver investors should be wary of the recent performance of the U.S. dollar against the euro (NYSEARCA:FXE). The euro has rallied 5% in the last month in currency trading, making gold's 2% loss in weakening dollar terms somewhat deceptive. In euro terms, gold is down 7% since mid-November.
I remain a long-term gold and silver bull and hold physical silver purchased in 2009 around $14/oz. With a bearish short-term view, my favorite and recently most successful trade remains shorting gold mining stocks (NYSEARCA:GDX), which have underperformed bullion substantially for years. I am short leveraged mining companies Eldorado Gold (NYSE:EGO) and Yamana (NYSE:AUY), which are two of the best growth stories in the industry. Another is Richmont Mines (NYSEMKT:RIC), which is down 90% in 2012 after reporting a poor quarter and closing a top mine. Growth is a temporary, if not evanescent, phenomenon in precious metals mining, as explained in a recent Seeking Alpha article. Priced to continue rapid growth attained in recent years, AUY and EGO stand to lose more than most mining stocks as prices fall and profitable projects dissipate.
Ultimately, I expect to have another chance to buy silver near $14 as bearish sentiment capitulates in 2013, but will flip from short-term bearish to long-term bullish in my portfolio positioning if the white metal gets "flushed" to near $20/oz. Such a move would likely have gold swirling around $1,400/oz.