Base metals are likely to outpace precious metals in 2013, says Hallgarten & Co’s Chris Ecclestone.
Writing in a note out today, Ecclestone explains that, while many gold bugs have been touting prices of $2,500 an ounce or higher for the yellow metal, “the sad fact is that any sort of economic growth will be seized upon by Ben Bernanke to unwind QE3 gradually. The economic simpletons think that the money pumped out into the marketplace by the US Federal Reserve cannot be called back to the mothership when it very much can.”
Part of the problem, he says is the failure to recognise that monetary policy during the Greenspan era was characterised by a level of overkill that is absent from the reactive, Bernanke-led Federal Reserve.
“Those who forget that Bernanke’s field of specialty is the Depression do so at their peril. While Greenspan was a “girl who can’t say no” when it came to winding back a monetary expansion or an interest rate decrease, Bernanke is very much more touchy-feely on the levers of economic power.”
Ecclestone adds, “The difference should be apparent from how things might have played out under Greenspan. He never would have wound back QE2 until there was a rip-roaring, eye-popping asset boom going on and, even then, he never knew how to take his foot off the accelerator. Bernanke, as history has shown, retreated from QE2 too early.”
For Ecclestone, the various QE attempts undertaken in the US since 2008 are best described as an attempt to resurface an enormous pothole of debt in the economic roadway.
After 2008, a massive chunk of the economy (the housing and construction complex), Ecclestone says, had been vaporised, along with 25-40% of the housing stock.
“Bernanke was like a road crew filling in the hole. He thought QE2 had remade the road surface but time compacted the material he used to fill in the hole and thus the road still had a massive dip. QE3 is the attempt to finally even the surface and bring it back to 2008 or (more realistically) 2006 levels.”
If this is indeed the case, then the various versions of QE, rather than leading to a massive inflationary spike, will bring the economy back to levels last seen prior to the financial crisis.
“When this point is reached the gold bugs may verily be facing a rather dull outlook for their gold at $2500 prognostications. If, after nearly six years of lost economic activity, the Western economies putter back to life (and there is no reason they should stay permanently in the dumpster) then the outlook for base metals must be better than currently. This is why our big thesis for 2013 is that base metals will outpace precious metals,” Ecclestone says.