Surge in gold and silver just starting
An impressive rebound in the precious metals is set to continue as central bankers have no choice but to support a fitful recovery with new stimulus.
While stocks have paused at resistance near 1,420 on the S&P 500, which represents the 2012 highs, precious metals continue their move higher as ancillary markets still believe, apparently, that central banks -- here at home as well as in Europe and in China -- are poised to unleash additional stimulus.
Friday's action provided a perfect example of this. Gold and silver, along with stocks, launched higher on reports that the European Central Bank is considering a "band yield" to cap Spanish and Italian borrowing costs. Fed chief Ben Bernanke also told members of Congress that there is room for further policy easing.
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I can't say enough about how good the surge in the precious metals is looking. All the pieces are lining up for continued gains: subdued sentiment, aggressive "smart money" futures market positioning, technical strength, fundamental support (central bank easing), and favorable currency trends (dollar weakness).
Policy risk also remains biased to the upside. The Fed is moving closer to taking new action. The People's Bank of China is experimenting with bond repurchase operations as a way of forcing cheap cash into the economy.
And in Europe, German politicians are growing increasingly supportive of the European Central Bank's willingness to cap Spanish and Italian borrowing costs in exchange for fiscal austerity measures -- measures Madrid and Rome were going to have to enact anyway under the Eurozone's new "fiscal pact" that was negotiated late last year.
There are increasing indications that Spain is moving closer to requesting official support. Leaders there are realizing that the budget austerity measures required to receive the benefit of ECB bond purchases and a reduced borrowing cost in the open market are very similar to what the government is already considering. So they might was well do it.
The Spanish deficit-to-GDP target is 5.3% this year and 3% for 2013. Because of increased financing costs and ongoing economic weakness, Madrid is said to be considering additional austerity measures to meet its 2012 target, focusing on a tax increase plan. All of this comes after a previous round of austerity measures bagged €54 billion in budget savings through 2014.
The German central bank, the Bundesbank, remains opposed to these efforts for fear of stoking inflation, but that's like saying the Republicans are pro-life. It's part of the institution's identity to be against it.
What matters is that German leaders, mindful of the costs of allowing Spain and Italy to lose access to the capital markets -- given that they are two of the largest contributors to the Eurozone bailout funds -- are becoming more open to the idea of an aggressive response by the ECB.
The globally coordinated dump of cheap money will send investors, more focused on fear than greed these days, out of fixed-income assets and into stocks and precious metals. I believe the bulk of the flows will be directed at the latter, at least initially, since people seem to have a great hate for equities right now, given fears over the "fiscal cliff" here at home, a slowdown in corporate earnings growth and the specter of a Greek exit from the Eurozone.
It's time to move into the sector. My newsletter subscribers added the VelocityShares 3x Silver (USLV) back on July 24 -- a position that is also in the Edge Letter Sample Portfolio -- and are now enjoying an unrealized gain of 45%. Other highlights include silver miner First Majestic (AG), up 23% since late July, and Market Vectors Junior Gold Miners (GDXJ), up 22.5%.
Disclosure: Anthony has recommended USLV, AG, and GDXJ to his newsletter subscribers.
Check out Anthony's investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up. Contact Anthony at firstname.lastname@example.org and follow him on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.
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