Where do Precious Metals Go From Here?

[The following post is by TDV Senior Analyst, Ed Bugos]

I urge you to consider my arguments for investing in gold and silver, and the miners that extract it.

I am holding on to my post 2008 forecast for gold reaching $3-5k per ounce by 2017 (and silver reaching $100) because the world’s largest governments continue their plunge into default, and cannot afford to let interest rates normalize if they don’t want to be forced into a rationalization.

It may be arguable at what point it became unfeasible in the US to allow the market to drive interest rates.  Admittedly, it would be unusual for the market to determine interest rates without interference from the all-knowing bureaucrat at any time, trained as they are in the art of spinning infinite financial verbiage.  Yet, since Volcker’s day, it has also become increasingly less feasible even if they wanted.

It seems so obvious to me that the bureaucracy is not only taking the path of least resistance – cheap money – but that it is also trapped in this policy, i.e. trapped in a lie to the public about the state of the government, and of the malinvested economy.  This can only lead the world into another stagflation.

In my original (2000-01) call for the bull market to end in 2013, it is true that I expected stagflation to have already occurred.  I hope you forgive me for not being prescient enough.  To my credit though, it is hardly arguable that we got the “stag.”  If that were not true the Fed would have long exited from its zero interest rate policy and likely would not have coordinated a global alliance to do the same thing.

As for the ‘flation’, or lack thereof, I failed to anticipate such a large demand shock in 2008, or the persistence of deflation fears, and other factors that encouraged cash hoarding by both individuals and businesses.  On the other hand, though, many economists underestimated how much money the Fed created in the post 2008 period.  This was because on the one hand they monitored the Fed’s own haphazard categories of money (hurray for transparency) and on the other they really just have no idea what they are talking about.  Think what you want but I know it is true when they pull out tired old phrases like “velocity of circulation”, or if they claim that while the central bank has created high-powered money it hasn’t made it out into the economy.  It is sitting there piling up in bank vaults, or so goes the lore  – and meanwhile the stock market averages are making new highs every other week.

Finally it is easy to forget that before the last tightening (2004-07) precipitated the 2008 financial and economic crisis prices were accelerating, especially for food and energy.  You can be sure that if there was no tightening and no demand shock the ‘flation’ part would have become a bigger problem.

But Its Postponement Is No Reason To Get Complacent About It

After all, among some of the other things that I did not anticipate was the Fed’s post-2008 policy.

I would have never believed back then that after being widely persecuted for causing the tech, real estate and commodity bubbles of the 1999-2008 period, the public would have let it get away with even more monetary chicanery –including the blatant bailout of its crony friends in broad daylight.

The justification – to save the economy – is about as bankrupt as it can get but the nearly $5 trillion manufactured by the banking system since 2008 is motivational, thanks in part to your deflation fears.

They just laughed in our face and stepped on the gas pedal, driving stocks to highs that I did not imagine because I could not imagine them throwing caution to the wind like that, at least not back in the Y2K years when “The Greenspan Put” itself was still relatively new.  The Fed wasn’t that bold yet.

But all lies start small.  Just a little bubble!  C’mon, mummy, just a little one??

Now they have to do it to cover up the biggest lie of all: that the world’s largest governments are insolvent today.  They are covering this up by having pushed interest rates on the least sound of sovereigns to near zero through various unsustainable inflationary schemes involving a global alliance of central banks and governments.  If economic law exists, the attempt to coercively suppress interest rates for so many years, and down to 50 year lows, is going to bring about unwanted consequences.

One thing that low interest rates will not bring about is more saving, which ultimately fuels investment.

Another thing they won’t bring about is less debt and more financial discipline.

Those are just a couple examples of the harm of the policy –all you have to do is keep thinking.

Significant Bottom at Hand?

I believe that gold and silver prices have bottomed; or if not, are close to it.  Granted, I have believed this for two years now and have been both right and wrong.  Wrong in that my number was $1350, but right in that it is not down a lot from there so far.  With silver I was more wrong, expecting it to bottom at $20-ish.  I am also a lot wrong about the gold shares, which I thought bottomed at the end of 2012.

The bottom in gold – modeled on a 1975 retracement scenario – would be $1050.

I cannot rule it out; I am just more bullish than that.

The more bearish projections out there are calling for between $800 and $1000 per ounce.

I think that assumes a secular bear – like the one that began in the eighties – which lasted 20 years.

That scenario has powerful implications but it is also based on rising real interest rates – which was only able to occur in the 1980’s because the Volcker Fed abandoned the cheap money policy.  The recent occurrence of rising real rates I don’t believe is very sustainable.  So I have ruled out this scenario because it does not fit the precedent historically or theoretically.

Likewise, I have long ruled out the debt deflation scenario conjured up by professor Fisher, one of the chief proponents of the Fed in its early days.  That scenario is not likely at the moment because there is nothing to restrict a central bank from printing money (that’s why they killed the gold standard) other than public opinion and political will, and incentives favor it neither politically nor commercially.

Either preceding scenarios ( a gold price under $1050) are possible if the Fed were to stop printing and let interest rates normalize.  But we are arguing that it can no longer do this, and that it knows it can’t… not for long.

The only other way I believe you will see gold below $1000 again or silver close to $10 is if the Fed announced QE4 –but at the right time!  What would be the right time?  Hindsight knows best, but it is not here.  The ideal time might be after a little rally in gold and a 20% correction in the S&P 500.

If your investment time horizon is longer than a year the case for gold and silver is a no brainer, whether or not they fall a bit more in value first.  Technically, we are at another crossroads where it can go either way for the next $100 or so.  I would not try to outsmart the market at this juncture.

It is easy to be out right now.  And it was easy to be long in 2011.  Don’t do what’s easy.

I don’t want you telling me you wished you listened to me; I want you thanking me that you did!

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