Since the beginning of this year, I’ve been warning investors that gold won’t take off on a sustained rally until we get two things:
1) Normalcy in the markets — no more scary headlines warning of impending economic doom. These days, when investors think the global financial system is about to come crashing down, they run to cash (i.e., the U.S. dollar). Worse yet, speculators sell their long gold positions to raise cash.
I’ve been saying for months that, until things calm down enough for investors to buy gold for reasons of greed (or long-term protection) rather than outright fear, we won’t see a consistent uptrend for the metal and the mining shares.
2) A consensus on monetary reflation. The market at large needs to understand that the U.S. and Europe are facing massive money printing over the next few years. The mountainous debts that have been piled up can only be dealt with by dramatically expanding the supplies of dollars and euros. There is simply no alternative.
With these two prerequisites achieved, investors will understand that far higher prices are in store for gold, silver and other commodities, along with the associated equities.
The good news: It seems like these pieces are falling into place. The European Central Bank seems determined to provide whatever level of liquidity needed to keep the eurozone afloat. And in Fed Chairman Ben Bernanke’s recent Congressional testimony, he steadfastly maintained his resolve for loose-money policies through 2014, despite improving employment numbers since the last Fed meeting.
In addition, the Bank of England recently boosted its quantitative easing plan to 325 billion pounds, while the ECB also agreed to take on more risk via looser collateral requirements for its liquidity programs.
It all adds up to more money, and lots of it, dumped onto the world’s markets. While central bankers acknowledge some inflationary risk, they also realize that there is simply no alternative, and these loose-money policies will also have the salutary effect of lifting equity and real estate prices.
These central bankers probably also agree with my contention that, at least initially, this broad-scale monetary reflation in the West won’t have too much of an impact on retail price inflation. The price-depressing effects of low-price imports from the developing world (think Wal-Mart) will serve to dampen prices for consumers.
But these policies will provide rocket fuel to the commodity markets, particularly the metals. And, if we can avoid financial crises, this bull run will also lift the mining shares.
It’s already beginning to happen, and I think it’s very likely that this spring will see a very nice run in the metals.
Brien Lundin-Kitco News-February 28, 2012