The good days are back again. The Dow Jones Industrial Average is flirting with 16,000 again. The Federal Reserve chairman is telling Congress that ultra-low interest rates will continue for the foreseeable future.
But now, as it becomes clear the Fed won’t stop until inflation returns, investors are moving back into gold and silver for the first time since July.
Here’s why.
Today, new Fed chair Janet Yellen, in her first appearance to Congress, sounded a definitively dovish tone despite indicating that the taper of the ongoing QE3 bond purchase stimulus would continue at a $10 billion-a-meeting pace. She noted that the labor market is far from healed despite a quicker-than-expected drop in the unemployment rate in recent months. She defended the Fed’s extreme monetary policy experiments, saying they’ve clearly helped the recovery.
And she picked up the gauntlet from her predecessor, Ben Bernanke, in refocusing the Fed’s efforts from bond-buying stimulus to a more amorphous concept known as “forward guidance” — or pledging to keep short-term interest rates lower for longer.
To do this, she backed away from the Fed’s 6.5% unemployment rate threshold that Bernanke had pegged as a level that the Fed would need to see before raising rates from near 0% — where they’ve been since 2008 — and refocused on other metrics such as long-term unemployment, those working part-time for economic reasons, and the fact that inflation is still rather low.
Long story short, Yellen’s Fed isn’t going to move on short-term rates until its preferred annual inflation measure moves to 2.5% vs. its current perch of 1.1%. It’s worth noting that this measure, which measures the rate of inflation on core personal consumption expenditures, hasn’t hit 2.5% since January 2012. So it could be a while.
With the Fed telegraphing that it’s not going to raise the price of money until inflation becomes a problem, investors are understandably refocusing on the inflation protection offered by gold and silver. The SPDR Gold Shares (GLD) is pushing above its upper Bollinger Band to an extent not seen since July.
Precious metals mining stocks, which started perking up on Monday, are taking flight. Just look at the chart of the Global X Silver Miners (SIL) as it goes vertical.
Precious metals and the related mining stocks represent a rare area of value in a market where valuations are no longer attractive and earnings growth is slowing. I’ve recommended SIL as well as Harmony Gold (HMY) and Great Panther Silver (GPL) among others to my subscribers. Since I added them to my Edge Letter Sample Portfolio on Monday, both SIL and GPL are up 5.1%.
Anthony Mirhaydari is founder of the Edge, an investment advisory newsletter, as well as Mirhaydari Capital Management, a registered investment advisory firm. As of this writing, he had recommended HMY, GPL, and SIL to his clients.
