High frequency traders, institutions and retail investors pushed markets lower today, and in recent days, after a brief reprieve from the selling abated in to a liquidation frenzy. Gold made new record highs, silver stayed strong as the commodity complex crumbled. Most investors are very nervous about the prospects of another recession looming, but the reality is we’ve been in a depression for four years and a recession within a depression is looming.
We’ve been enjoying the eye of the storm since April of 2009, when the banking system no longer was obligated to mark its assets to their real values and trillions of dollars were injected in to the banking system. Unfortunately the sugar high has worn off, and now the situation is worse than before.
As the oversold correction was neutralized by short covering, opportunistic buying and technical traders the stream of bad news resumed, with more worrisome headlines about the Greek debt situation, widespread investigations in to high frequency trading firms, a spread of the European bank contagion because of their leveraged bad debt holdings, and American banks facing the prospect of the credit default swaps they sold to the EU banks being called in.
In addition, economic data has been deteriorating, with poor jobs, inflation and housing data rattling the fundamental picture from a recovery to the brink of an economic contraction. Inflation and unemployment are higher, while new home sales are flopping.
With these economic headwinds, and several market powderkegs ready to blow, the average investor is looking for a safe haven. Many are buying US Treasury bonds, pushing the yields to record lows below 2% on the 10 year and collapsing the 2s to 10s spread, making lending less lucrative for banks. Others are turning to precious metals, as we see gold, silver and even platinum have good price action and solid technicals.
At this point the likelihood that a significant further leg down in the economic picture and within the equities markets will occur has heightened significantly. The macroeconomic risks in most developed and emerging countries, ranging from inflation, social unrest, high unemployment, losses in investments and property, continue to gain momentum and appear to be converging as a catalyst towards a global risk asset sell-off, the likes of which we haven’t experienced since 2008-2009.
The likelihood of bank holidays and further government and Federal Reserve intervention in to bond markets, money markets and potentially equity markets has also heightened. Further fiscal and monetary policy that accommodates a deflationary environment will more than likely occur within the next quarter.
Gold and silver prices should head much higher because of the aforementioned situation and response. Gold is due for a correction, but when that may occur is questionable given the mood of the markets and the desire to hold tangible assets over equities or paper currencies. Silver on the other hand is poised to test the $42.50 resistance level, and if it can breach higher, potentially test the $48-50.00 area where the last high was made. Within the next 3-5 years, it is very likely that both gold and silver will be multiples higher than they are today in terms of pricing in US dollars.
Either a deflationary depression or a hyperinflationary monetary collapse would be beneficial for precious metals in the short, intermediate and long term. Whether or not such severe events occur is uncertain at this point, but currently deflationary forces are at battle with inflationary central bank policies — and it is extremely rare that either economic catalyst is balanced out perfectly with the other. Instead, massive bouts of volatility and overshooting towards deflation or inflation are a more likely scenario, as tools of fiscal and monetary policy are more like howitzers than scalpels.