We don't see any upside for Gold (NYSEARCA:GLD) and Silver (NYSEARCA:SLV) at current levels as monetary stimulus measures are unwound. We would be sellers of these assets and hedge such a position with platinum or palladium.
Real interest rates are going up, and this is what really matters
Recent emerging markets jitters gave a boost to precious metals as some investors decided to decrease exposure to local currencies. But once the dust settles, investors are likely to have a closer look at the dynamics behind the recent rise in precious metals, and to sell them in our view.
In our view, a rally in precious metals requires a loose monetary policy and a declining consumer purchasing power in real terms. Precious metals are strong notably when interest rates are lower than inflation.
We believe that emerging markets' central banks prompt and decisive action does not play in favor of a sustained gold and silver rally. In emerging countries such as Brazil, India and Turkey, inflation now stands at respectively 5.9%, 6.2% and 7.5% while interest rates moved up sharply (1Y yields respectively at 11.8%, 8.6% and 11.4%).
Emerging markets central banks have learnt from the past
One of the main problems of emerging markets economies is their increasing current account deficits as "easy" money is pulled away due to the ongoing FED tapering. In the past, those countries were quite slow to act and did not act decisively. This time around, the situation is completely different as those countries know that this is the only way to fight rising inflation and current account deficits.
Palladium and platinum are our top picks in the precious metals space
We would hedge any short position in Gold or Silver with Palladium or Platinum. Palladium and Platinum have industrial uses (2/3 of the palladium supply is used by the auto industry notably for the production of catalytic converters) and are therefore likely to benefit from the US economic strength and the improving outlook in Europe.