After a two year bear market for gold and silver, it would not be an exaggeration to say that precious metals bulls have been discredited. Those waiting for the end of the US Dollar reserve system, imminent COMEX default, hyperinflation, hyperdeflation, or a just good old fashioned economic collapse don’t look so hot right now. Those with a bearish stance on the U.S equity market are also looking foolish with a teflon U.S. stock market that appears impervious to a number of risks on the horizon, ranging from higher oil prices, Middle Eastern conflict, and Emerging Market turbulence, to name just a few.
Bearish sentiment toward the precious metals is also aided by the aftermath of a bloody, 1987 style crash in metals prices this past spring. This crash demonstrated once again how electronic trading entirely divorced from physical demand can set the price of metals like gold or silver—even in the face of strong sales of bars and coins. In fact, it was recently reported that not only are coin sales hitting records, but that even the SLV ETF is once again seeing inflows. Not exactly facts you would associate with a protracted bear market.
But with assets so dependent upon the whims of commodity speculators, it is worth examining some of the bearish arguments made by those waiting for new lows in precious metals prices. I feel that some of the bearish points found below seem just as off the mark as those made by bulls who were convinced a major global collapse was just around the corner two years ago.
Here are four bearish metals beliefs that, at least based on history, aren’t based on fact:
1) Higher yields are bad for precious metals:
From 1971 through 1980, gold and silver rose with yields, as they did from 2003-2007.
2) Higher stock prices are bad for precious metals:
At varying points in the last bull market in silver (which technically began in the 1930s, even though few could trade silver then), stocks and precious metals prices have also moved higher together. Stocks and precious metals also moved higher together from 2003 to 2006.
3) The Taper is bad for the metals:
The corrolary to this is that monetary tightening is bad for metals. I would agree with this if tightening were actually leading to positive real interest rates for savers (people investing in bank deposits or short term bonds), but the simple fact is that whatever tapering or tightening is going on will not turn real rates positive, as they once were at varying points in the 1980s and 1990s.
4) Finally, a higher dollar is bad for the metals:
I find it a bit shocking that so many analysts and commentators are continually wedded to the notion that just because the USD index has gone up since last year (and may be poised to continue the trend if foreign capital floods to the US in the months ahead) that gold and silver have to go down. Have these commentators looked at the chart of the USD since 2008? This chart has essentially gone nowhere (with wild swings mind you) for nearly 5 years. But even with the recent crash in gold and silver, both metals are higher than their average prices for 2008.
The bull market in gold and silver has existed in all currencies by the way, so this bull market is not just about the dollar.
Besides being real assets that can be used as barter, gold and silver exist as a private form of wealth outside the banking system—a very important thing now that we have confirmation of the bank bail-in concept, in addition to other challenges facing savers from zero percent yields. The precious metals also represent an opportunity—though hardly a guarantee—to grow your wealth. As much as I believe that some gold and silver bulls need to re-evaluate their discourse of doom and gloom to argue for higher precious metals prices, I am even more convinced that gold and silver bears are in need of some new arguments for their case, especially after these markets have so badly underperformed over the past two years. I believe the bad news is already priced into precious metals prices, and those with a negative outlook are fighting the last war.
