French torero Marco Leal performs a pass to a Garcigrande bull during the Easter feria on April 02, 2009 in Arles, southern France. (Image credit: AFP via @daylife)  Bernanke delivered the fatal blow to gold’s ten year bull market, according to Dennis Gartman. Gold has been in bear territory since the summer of 2011, when it topped out above $1,900 an ounce, with the latest post-FOMC sell-off inflicting irreparable technical damage, he says. UBS’ Edel Tully adds that markets’ no-QE-for-now realization will push gold even lower, probably down to $1,550 an ounce over the next month.  Over the last couple of years, gold’s precipitous, and continued, rise fueled causal theories, with some investors attributing it to U.S. dollar weakness, others to a safe haven trade in the face of widespread market turmoil, an inflation hedge, or whatever they could correlate a chart with. The yellow metal, though, appears as a Humean experiment in causality, marrying no single trend.  Gold has fallen nearly 9% since late February, trading at $1,628.5 an ounce on Thursday in New York. Gold went on a rollercoaster ride over the last 12 months, rising to an all-time high above $1,900 last spring, then tanking about 18% to December, then rising a further 15.5% to this February.  According to Gartman, gold’s latest price action confirms the trend line has clearly been broken, indicating we’ve been in a bear market for 12 months, since it peaked. In Thursday’s Gartman Letter, “in retrospect it does appear that gold has not been in a bull market but has indeed been in a bear market” since August 2011, when it peaked above $1,900.  “Since then,” he added “each new interim low has been lower and each new interim high has followed. How, we ask, had we missed that fact!”  The catalyst for that realization has been the Fed, specifically the latest FOMC meeting and Wednesday’s minutes from that meeting. In both, markets caught a glimpse of a more optimistic Fed that, while keeping the option on the table, has seen the necessity for a further round of quantitative easing reduced by the improved economic performance. UBS’ Edel Tully adds:  The minutes painted a rather more optimistic view on growth, a more convincing take on the basis for the decline in the unemployment rate and most worryingly of all for gold, an acknowledgement by the Fed of the potential for a change in the end-2014 forward guidance.  With the Bernanke Fed guiding markets over the last couple of years, it should come as no surprise that gold prices are very sensitive to monetary policy. Record low interest rates amid a weak global economy pushed nervous investors out of both risk assets and the safety of Treasuries. A weak U.S. dollar, along with massive liquidity injections via QE, helped investors look to gold for it has always been: a store of value.  No QE3 and higher interest rates before late-2014 would cause further damage to gold, as it would signal an improving economic environment where capital should once again channel into productive, and thus riskier, assets. Fed unwinding will definitely deal a deadly blow to gold bulls, so the real question investors should be asking is: are we out of the woods yet?  If the gradual pace of economic improvement in the U.S. and the relative calm of European markets persists, then the global economy might be close to the edge of those woods. Bernanke has remained cautious, noting downside risks still abound, while ECB chief Mario Draghi was blunter on Wednesday saying risks are definitely skewed to the downside. Housing markets in the U.S. remain depressed and labor markets, while healthier, are still relatively weak.  Among the best at illustrating the bear case is Peter Schiff of Euro Pacific Precious Metals. “Don’t catch the recovery fever” he told investors in his daily newsletter, adding “the recovery is not only going to falter – it’s going to evaporate like the mirage it is!”  Schiff expects substantially higher interest rates, which went untested in the recent stress tests on banks, to blow the lid off major financial institutiosn. Large Wall Street names like JPMorgan Chase, Citi, and Bank of America have relied on cheap money from the Fed to keep operating. Rising inflation, as a consequence of money printing and bond buying by the Fed, will force Bernanke to raise rates. From Schiff’s newsletter:  In fact, higher interest rates are not only possible, but probable. The stress tests assume long-term Treasury note yields stay under 1.8%; but that figure is the current six-month low on the 10-year, which is already dragging along its historical floor. As I write, yields are already up to 2.2%. The post-war average is about 5.2% – high enough to crater today’s banking system.  The stage is set for gold to continue falling in the immediate-term. Higher interest rates and an improved economic environment suggest it’s time to put capital back to work. The improving outlook does face substantial threats, though, particularly the European sovereign debt crisis (which promises to flare up again), which could stoke recessionary fears. Add Schiff’s predicted inflation, and you could see the yellow metal rally rise through the ashes like the Fenix. At the end of the day, it all boils down to the true strength of the economic recovery. Stay tuned.
Has the decade-long gold rally come to an end? Dennis Gartman seems to believe it has, particularly after Bernanke took QE3 off the table for the moment, but a second coming of the crisis could resuscitate it.