So much for safe havens. In just one day, gold plunged $149 and it is now down 29% from its 2011 peak. Silver is down a gob-smacking 53% from its high. The entire metals complex has been soft lately, from copper to aluminum to palladium. But itâ€™s the precious metals that are getting clobbered.
While itâ€™s too soon to know if goldâ€™s rally is really over, many analysts are already issuing judgment. Some say the commodity supercycle is over. Others say gold is falling because the economic data in China is weak. Still others say it is because the growth data in the US is strong. An even less persuasive explanation is Cyprus, where authorities are selling off their excess gold reserves as part of their rescue plan.
Perhaps the simplest explanation is that the panic that started it all is finally dissipating. When the global financial crisis struck in 2008, markets froze, panic spread that a new depression was at hand, and gold surged for the next three years. In July 2011, McAlinden Research argued that gold was losing its luster and could eventually plunge. As it happens, gold peaked in September 2011 and began trending slightly downward as the global economy edged back from the precipice, a new depression was averted, and the sense of panic began gradually dissipating.
And now the plunge. At least three events have combined to accelerate the un-panic trade in gold: equities are hitting new highs as greed displaces fear in the markets, recent volatility notwithstanding; the US housing sector, which took the blame for starting the crisis in the first place, is now turning up; and many Fed policymakers are credibly signaling that the high-water mark of easy monetary policy has been reached. All three events helped to push perceptions to a tipping point. While problems remain, the prospect of an utter collapse of the global economy is vanishing into thin air, and with it the panic that powered the surge in gold in the first place.
The last bear market in precious metals lasted thirty years, so the current sell-off might just be getting started. But even a prolonged bear market could be punctuated by sharp rallies that are occasioned by fresh outbreaks of new panics. The Fedâ€™s massive epic experiment with quantitative easing itself, to take one leading candidate, could eventually feed a sharp increase in the money supply and cause inflationary pressures to rise faster than the Fed is able to turn monetary policy around.
Warren Hatch, PhD, CFA
Chief Investment Strategist
McAlinden Research - a division of Catalpa Capital Advisors, LLC.