Here We Go Again: Precious Metals Edition

The comments below are an edited and abridged synopsis of an article by John Rubino

The game the government and the financial markets have been playing for the past few years, in which stocks tank until the Fed capitulates and agrees to cut interest rates and/or ramp up QE, after which markets soar, is usually measured in stock price terms.

Here We Go Again: Precious Metals Edition | BullionBuzz
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In other words, the S&P 500 drops by 18% in two weeks, and that gets the Fed to fire up the printing press.

But precious metals also tend to be swept along on these tides of hot money. In March, for instance, stocks tanked, but so  did supposedly non-correlated assets like gold and silver.

This is probably because when your stocks are plunging you have to raise money, and the easiest way to do that is to sell whatever is up recently and liquid enough to be easily moved. So you don’t sell your house, but you do sell some gold, silver, mining stocks or, precious metals futures contracts.

Then the Fed rides to the rescue and precious metals retrace their decline on the prospect of huge new infusions of easy money.

Well, here we go again. The Fed promises low interest rates for years to come, but stocks read this as ‘no further cuts’ and proceed to roll over. Gold and silver get slammed in the general rush into cash.

Stocks, gold and silver will fall until the Fed/Congress provide another big cash infusion. That’s already coming on the fiscal side, as Congress debates the size of the next pandemic stimulus bill. If it includes another round of $1,200 checks, that alone might revive the market. If not, the focus will shift to the Fed, which will be forced into a ‘whatever it takes’ stance that includes negative interest rates and possibly direct purchase of equities.

Either way, precious metals and related mining stocks will suffer for a while and then resume their bull markets. In the mining stock universe there are literally hundreds of examples of a March collapse followed by parabolic recovery in subsequent months.

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