Gold: Where Is The Yellen Rally?

 |  Includes: GLD, SLV, TLT
by: BubbleBustInvesting

Investors hoping for a "dove" at the helm of the Fed got their wishes come true with President Obama's nomination of Ms. Yellen to succeed Chairman Bernanke. A Yellen Fed is very likely to continue Bernanke's accommodative monetary policy-keep interest rates near zero as far as the eye can see. Isn't that bullish for gold?

It should be, but judging from today's performance of the yellow metal, the answer is no-gold was down $20 dollars in the early morning trade. What's going on? What should investors do?

It depends on the investment horizon of each investor. Short-term oriented investors may want to stay away from the metal, as it trades below technical barriers. Long-term investors should have a portion of their assets in precious metals, together with some cash, for Fed's end game, which includes two possible scenarios:

The Conventional Scenario: A prolonged period of global QE easing ends in hyperinflation. That's why many experts recommended the holding of precious metals as soon as the Fed launched the first round of QE, fueling a strong rally in precious metals. But QE isn't a conventional monetary policy that works through the commodity market--stimulating demand for good and services that fuels commodity inflation. It is a non-conventional policy that works through the asset market, stimulating demand for risky assets that fuels multi-asset bubbles that eventually burst, depressing demand for goods and services, and inflation. That could certainly explain why after four years of QE, inflation remains subdued, below 2 percent, and precious metals are heading south.

Major ETFs


5-day Performance (%)

1-Year Performance (%)

5-year Performance (%)





iShares Silver Trust (NYSEARCA:SLV)




iShares Barclays 20+ Year Treasury Bond (NYSEARCA:TLT)




Click to enlarge

Worse, asset bursts may turn mild inflation into deflation, as has been the case in Japan in the late 1990s and the early 2000s. That's the non-conventional scenario where cash, not precious metal, is king. In addition, QE creates a strong positive correlation across asset categories that exacerbate both the bubble and the burst. Worse, when it is simultaneously pursued by several central banks, it is risking currency wars.

This harsh reality about QE creates a serious dilemma for central bankers:

Continue to reflate asset bubbles until national currencies collapse, where gold is king, or leave with a depression where cash is the king.

Which scenario is most likely? It's everyone's guess at this point. That's why cash and precious metals should both be part of a portfolio for the end game.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.