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Commentary & Analysis
Silver is not quite as precious as gold or Jimmy Rogers’ bow-tie.
Mr. Rogers makes commodities sound so easy. Even when he’s not wearing his bow-tie, Jimmy Rogers has it nailed – commodities are in a secular bull market. And his go-to argument is now whittled down to this:
If the world doesn’t grow, they’ll print more money; if the world grows, we’ll run out of commodities.
In fairness, in his latest Reuters interview Jimmy Rogers acknowledged that new discoveries will be made and new production will be brought online to alleviate these supply shortfalls; but that’s not going to happen any time soon.
Sounds good to me. And definitely sounds better than “They’ll print money until we run out of trees,” which Jimmy supposedly uttered at least once. And speaking of printing money, I would say the consensus is very much in Jimmy’s camp. Evidence came with the release of yesterday’s Fed minutes.
The FOMC minutes contained little information of substance. And despite the fact that members were mostly split on whether to provide more stimulus, the markets jumped all over the minutes as if QE3 starts tomorrow.
Has the Fed set a bad precedent? Ok, I think I know that answer … so please go easy on the Fed hate mail. But I bring it up to point out that the consensus seems to be champing at the bit for a reason to buy, buy, buy. They’ll be hard-pressed to find a reason anywhere else, especially after last Friday’s disappointing payrolls report, which is why Bernanke was on the mic today – from Reuters:
“The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support,” Bernanke said in prepared testimony before the U.S. House of Representatives Financial Services Committee.
Outside of new quantitative easing I see two potential scripts that could support markets and shore up global growth sentiment:
- China: I think there is no question that China has helped the globe recover to the point at which we currently find ourselves. Investors would be happy to keep following China. But it seems there are too many question marks coming together all at once. The biggest question now: can we keep following China?
- Earnings: Second-quarter earnings season will begin soon. Previous earnings seasons have so far proven to support, or at worst neutral for, markets and risk appetite. The view heading into the season is that things could be rough for three reasons: unemployment, high input costs, and Japan’s earthquake/tsunami supply chain disruption. But the fact that so many companies have already drastically revised lower their earnings expectations means that the game might continue if the not-so-great is instead seen as better-than-expected.
It’s looking to me like investors will still need some form of QE3 unless the above two positively surprise.
In my Commodities Essential newsletter yesterday I included a short-term chart comparing gold and the US dollar. The two had been moving higher together; but today I want to note the recent divergence which was exacerbated by yesterday’s Fed minutes and now today’s Bernanke testimony:
Gold vs. USD, 4-hour:
So we’re seeing gold benefit from money fleeing the euro and we’re seeing gold benefit from rekindled QE-expectations. I think the arguments explaining this are clear by now. But Gramps (more commonly known as FIL) asked me yesterday whether I thought silver would follow gold.
To summarize my answer:
Silver will not follow gold if higher gold is driven purely by safe-haven flows.
Silver will follow gold if there is a component of risk-appetite in the market, likely provided via QE.
As I see it, silver is not as precious as gold; it does not carry the currency card well. I did, however, tell Gramps that there is a wild card here that may have an impact on how the mainstream views silver. Basically, it depends on how China views silver.
And China, through a Pan Asia Gold Exchange (read about it here), may be indicating they views silver as a legitimate investment that could eventually help them diversify their enormous currency reserves.