Low interest rates, inflation, and quantitative easing all contribute to a weaker US dollar going forward. While the US dollar looks strong like now in comparison to the Euro-mess, in the long term, current monetary policy is a positive for gold (GLD) and silver.
Earlier this year, some analysts were predicting gold and silver were "done for" in the absence of QE3.
Gold's violent plunge on Wednesday sent chills down the spines of investors, who ran for the exits as the yellow metal fell nearly $100 at one point. While the consensus suggests the market meltdown was a consequence of Fed Chairman Ben Bernanke's failure to suggest QE3 is on its way, the speed and magnitude of the decline was completely unexpected. It's up to physical buyers now, according to UBS' Edel Tully, to show if the decade-long gold rally suffered technical damage or if the "leap-year breakdown" was a one-time event.
The Forbes article I quoted above was, in fact, written on 03/01/2012. Over three months later, we still have no hint of QE3 from Bernanke. Silver retreated to support levels, but looks to be consolidating.
Where Do Gold and Silver Go From Here?
With US growth slowing, QE3 is by no means off the table. But the more important question is if silver (and gold) actually need QE3.
In light of the European crisis, massive bailout figures are being thrown about. Spain alone is seeking $125 billion. This is a huge figure, especially in context with TARP. While the American bailout amounted to 1-2% of GDP, the Spanish bailout is hovering around 7%.
The ECB solutions to remedy Europe's ailing finances will likely take similar forms to the American monetary policies that buoy gold and silver: cash injections, money printing, etcetera. This fact hasn't escaped the note of analysts, many of whom believe that loose European monetary policy could provide precious metals with a boost. As Edward Meir of INTL FCStone put it:
[T]he tendency to ease, lend more, rotate debt, bail out banks, and in extreme cases, print more Euros, are all options that policy makers will likely consider in the weeks ahead. Once the gold market picks up this scent, we suspect prices will likely move much higher. Silver will push up as well, riding on gold's coattails.
Mr. Meir's conclusion is mirrored by Charles Oliver, a senior portfolio manager at the well-respected Sprott Asset Management (the company behind PHYS and PSLV). Mr. Oliver believes that the following European actions will drive gold and silver higher:
- liquidity injections
- currency debasement (money printing)
- quantitative easing
Given the absolutely awful state of the economy in Europe (and, of course, the potential dissolution of the euro), it's not at all farfetched to conclude that Spain is by no means the last bailout we'll see. Each subsequent bailout means a looser grip on the purse strings -- and more upside for gold and silver.
Even though some banks have slightly cut their gold price forecasts, they acknowledge today's prices are by no means "too high" -- Societe Generale sees gold reaching at least $1,700 and challenging $1,800 at some point this year.
Conclusion: With or Without QE3, Future Looks Bright for Precious Metals
The macroeconomic conditions needed for a gold and silver rally are still in place. Even without further monetary stimulus by the Fed, analogous actions by European actors should sustain a rally in precious metals.
At this point, I'm bullish on gold and silver -- and by extension, gold miners (GDX) and silver miners (SIL). I may add to my current silver position and initiate one in gold. The ECB's response sheet for the Euro-mess is most likely a positive signal for precious metals investors.
Disclosure: I am long SLV.
Additional disclosure: I may initiate a long position in GLD and/or GDX in the next 72 hours.