The buzz over QE∞ has been quite amazing. Even seasoned traders are being pulled into the wake of the “don’t fight the Fed” mentality. Of course, on one hand they’re absolutely correct. Going against the printing press can be disastrous. However, there are tensions in the markets that will have to be resolved eventually, a topic that we spent a lot of time discussing this week.
But what should our expectations for precious metals be? We know that they’re viewed as a hedge by many. They’re seen as a risk asset and contrary indicator for the value of the dollar as well. And then there’s the more recent ability to trade in and out of precious metals, at least a paper version, via ETFs and other vehicles that have affected the market in a huge way. This is exasperated by the fact that not all ETFs, such as SLV and GLD, actually have fully allocated metals, introducing artificial supply; though a few vehicles and trading platforms, such as PSLV, PHYS and HAA, are strictly allocated.
With these factors in mind, we have had to start viewing metals in much the same way we view other commodities and even stocks, at least for the short term. Their behavior has become much more stock-like, if you will.
First, let’s take a look at this chart. This is from the week that Ben Bernanke announced the implementation of QE∞. Can you guess at what precise time he spoke?
Obviously the announcement affected the movement of prices in the short term. But does such a move hold over the long term? The Fed’s promise to keep buying the economy off can sustain it in ways that we can’t necessarily foretell. This results in a wrestling match between news and technical indicators in today’s precious metals’ prices.
As can be seen on the daily chart below, the RSI and MACD were already in severely overbought territory before the announcement, indicating that it’s time for a consolidation. Now the question remains, will the euphoria of QE∞ be able to overcome these technical indicators, keeping precious metals’ prices high?
While it is possible to press these indicators for a while, as we saw back in February of this year, eventually the pressure will need to be released. The difficult part is predicting whether or not we reach a new high before that happens, and just how deep such a consolidation will be. For now, traders should be very cautious and investors should consider very carefully that there just might be a pullback that offers a better entry in the near future, perhaps within the next few weeks.
Of course, this brings up the long-term outlook. QE∞ virtually guarantees the continued rise in gold (priced in dollars) by default, since it guarantees the continued erosion of the dollar’s value through inflation. However, even adjusted for inflation, it appears that gold’s bull run is far from over. This is where our longer-term chart helps tell the story.
As can be seen in the monthly chart, the RSI is has dropped down fairly low, though the MACD continues in the high range. This is pointing to the likelihood of higher prices in this continuing bull run. Any consideration of how QE∞ affects this should be viewed in light of the fundamental reality that the inflation of dollars all but guarantees the increase in gold priced in dollars in the long run.
With this in mind, perhaps the next pullback isn’t worth waiting for if investors are looking to hold for the long haul, especially if you’re considering precious metals allocated in your IRA. Timing is difficult. However, it may be better to get into the metals market rather than wait for a pullback that never satisfies your desired entry point. Such waiting can be costly.
J. Keith Johnson’s Austrian and libertarian perspectives on current socioeconomic and geopolitical affairs are fueled by his insatiable desire to both discover and share the truth. A Goldco Direct affiliate, you’ll find his commentary on The Gold Informant website, as well as various Internet financial and news sites.