Kitco’s director of Global Trading explains why the bull market in gold and silver will continue after the Fed’s QE3 decision last week.
Peter Hug is Kitco’s director of global trading. He has been involved in precious metals since 1974. Hug developed the first precious metals certificate program and the first margin trading accounts for metals on the cash market. Hug will be speaking at the 5th Annual Inside Commodities conference Oct. 10 in Chicago, and is one of a handful of experts who have succeeded through multiple bull and bear cycles on the strength and skills honed during the dramatic fluctuations of the 1980s. HAI’s Sumit Roy recently caught up with Hug to discuss the outlook for gold and silver after the Fed’s big announcement.
HAI: The immediate reaction to the Federal Reserve’s long-awaited third round of quantitative easing has been positive for gold, as one might expect. But is QE3 already priced in after the big rally from close to $1500 to nearly $1800?
Hug: I don’t think so, though the market may be a little tired at these levels. Back in early August, when gold was trading under $1600, we were looking for gold to rise to $1720 and for silver to rise to $33 or $34 after Labor Day.
There are many factors supporting gold and silver. First, the announcement by the European Central Bank that it would start its bond-buying program last week, the ratification by the German courts that the bond buying is constitutional for Germany, and finally, the latest Fed action.
It’s not so much QE3; the Fed didn’t add a specific amount of money. What they said that was more substantive than in past conversations is that they will continue to create liquidity for this market and continue to buy mortgage-backed securities even after the economy shows signs of recovery. Additionally, they extended their zero-interest-rate policy an additional year, to mid-2015.
The Fed has given the market a green light. You're going to get free money. If you're a little worried about the risks in the stock market after these runs and you're getting zero on your bond returns, you might look at the commodity sector to buy. Thus, gold and silver reacted accordingly.
HAI: Now that the Fed has played its cards, what do you see as the next major catalyst for gold?
Hug: The Fed hasn’t played its cards. It will continue to play its cards. I think that was the subtle, but major, difference in what Bernanke said. That said, you have issues in the European Union that have not yet been resolved. This is a very-headline-driven market. Europe is an issue that will continue until there's some clear evidence that the sovereign-debt crisis has been solved. I don’t think we’ll see that evidence until at least sometime probably spring or summer of next year.
Furthermore, the U.S. election is coming up, and you have the fiscal cliff coming at the end of the year. Any of these uncertainties is going to create floors for precious metals. I'm not discounting the fact that gold may drop $80 from here or that silver may give back a dollar or two. But I think these markets need to be purchased on pullbacks.
HAI: Speaking of that fiscal cliff you just touched on, how do you see that playing out for gold? That’s a positive, I assume.
Hug: It depends. It could be a positive, depending on how politicians address the fiscal cliff coming up. Congress is probably going to extend the tax credits or the tax breaks for six months to a year ahead of the election, which will give the incoming president the ability to deal with it.
The worrisome part about the fiscal cliff is that [ratings agency] Standard & Poor’s has warned that if there isn't some concrete action taken, it may lower the U.S. credit rating. The last time that happened, the U.S. stock market took a major hit, which should be beneficial for the metals. But what happens when you have that type of a hit to the stock market is that everybody starts looking for liquidity. Metals tend to be very liquid. So you’ll also get some selling pressure on the metals when that happens.