A correction in precious metals that is now taking place is due to a general conviction that the Fed has succeeded in its efforts to overcome the financial crisis. A pause or even a stop in the monetary easing cycle will lead to easing inflationary pressures and a significant US dollar rally. We believe this conviction is wrong!

The latest bull run in gold, which started in August 2007, was not due to the fears of inflation but due to a panic related to a financial crisis. Gold bull markets that are based on inflation occur during the rising long-term yield environment, similar to the 1970s and early 1980s. But that was not the case in the past nine months. Yields have been falling, but yield spreads have been rising, indicating increasing risk aversion among investors. Gold, like the T-Bills, was playing the role of a safe-haven during the times of great uncertainty.