Fool's Gold Report: Bullion and Miners Soar, But Will Central Banks Keep the Party Going?

On Wednesday, the precious-metals complex finally acted in concert, moving higher together in stark contrast to its more fragmented behavior earlier this week. Short-term traders pointed to tensions between Russia and Ukraine and signs of further deceleration of China's economic growth as justification for the move, especially as prices of crude oil and copper fell below key levels of $100 per barrel and $3 per pound, respectively. April gold futures jumped almost $24 per ounce to close at $1,370.50, while May silver followed suit with a $0.54 per ounce gain to nearly $21.36 per ounce. Those moves sent SPDR Gold Shares (GLD 0.74%) up about 1.5% and the iShares Silver Trust (SLV 0.72%) up more than 2%. The mining complex showed even greater strength, as the Market Vectors Gold Miners ETF (GDX 4.08%) climbed 3%. Platinum and palladium also posted substantial gains, making it a clean sweep for precious metals today.

Source: Kitco. As of 4:30 p.m. EST.

Why is a weak global economy good for gold?
Central banks have done everything in their power to try to stimulate economic growth in the years following the 2008 financial crisis. Most central banks around the world have taken extraordinary measures to ease monetary policy, not only exhausting traditional methods of encouraging greater levels of economic activity but also developing new, unprecedented alternatives in hopes of driving faster growth. The result for precious metals was that cheap money made it easier to invest in non-income-producing assets such as bullion, helping to push prices higher.

Image sources: Wikimedia Commons; Creative Commons/Armin Kubelbeck.

By contrast, the moment that the Federal Reserve even started contemplating slowing the rate of its bond purchases under quantitative easing, gold and other precious metals suffered. Again, the threat of removing liquidity from the financial system made gold the initial target for selling, as trying to finance gold purchases as long-term interest rates started to rise became a less attractive proposition.

Now, though, gold is reacting to the possibility that despite all the best efforts of central banks across the globe, key economies are still unhealthily weak. The specter of deflation in Europe has some calling for even lower interest rates in the eurozone, which would confirm the likelihood of easy monetary policy on the continent for several years at least. Meanwhile, China's continuing slowdown could also spur interest in gold, especially as the nation begins to experience debt defaults that could reverse what many see as a troublesome asset-price boom there.

Bullish on mining
Mining stocks were up strongly, with solid gains throughout the list of major players. Endeavour Silver (EXK 3.70%) was among the best performers, rising almost 11% and completely reversing losses that followed the silver miner's Monday earnings report. Despite a rise in silver production by more than half and a near-doubling in gold production, net losses widened and the company's adjusted earnings fell by more than 70% from year-ago levels. Yet a 21% drop in all-in costs helped offset big drops in realized silver and gold prices. Moreover, most mining stocks will have just one more quarter of poor comparisons to get through before finally hitting the April 2013 slump. As a result, you can expect the mood among miners to get even better in the not-so-distant future.

Looking forward, gold investors should watch the Federal Reserve's meeting next week to see whether it acknowledges some of the economic difficulties in other parts of the world. Although few expect a change of policy from the Fed, any indication of concern could make gold markets move even further in response.