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5 Catalysts That Will Spark a Bull Market in Gold and Silver

04/21/15

NEW YORK (TheStreet) -- The precious metals never broke below the respective lows they put in late last year. But prices have yet to break out decisively from their months-long trading range and enter a sustained new cyclical uptrend.

What will it take to spark a renewed bull market? Here are five likely catalysts:

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1. Federal Reserve delays interest rate hikes.

Federal Reserve chair Janet Yellen signaled to investors to anticipate interest rate hikes from the Fed later this year. Expectations of a tighter monetary policy have helped lift the U.S. dollar versus the euro and most other currencies. And despite the much stronger dollar compared to other fiat currencies, gold has held up well.

But if the Fed fails to follow through on its rhetoric with actual rate hikes, the dollar could tumble. And if that happens, it would be bullish for precious metals.

Fed governors say their decision will depend ultimately on whether the economic data -- especially pertaining to employment -- comes in stronger or weaker in the months ahead. Monetary and financial analyst Jim Rickards is among the Fed skeptics. He doubts the Federal Reserve's optimistic economic forecasts will pan out any more than its previous rosy forecasts have. Weaker than anticipated economic numbers will make rate hikes less likely. And that scenario will boost the odds of a new stimulus program and higher precious metals prices along with it.

2. Real Interest rates turn deeply negative.

The financial media can be counted on to heavily cover every rhetorical nuance regarding the Fed's coming decisions about interest rates. Yet there is typically scant coverage about the most important rate of interest: the real (after inflation) rate on benchmarks such as the federal funds rate and the 10-year Treasury note.

Real interest rates are positive when nominal rates exceed the inflation rate. When nominal rates are running below the inflation rate, then negative real interest rates are in force. Holding interest-bearing instruments that sport negative real rates is unappealing to savvy investors. Many will choose to hold precious metals instead.

It's important to recognize that interest rates can be going down in real terms, even when they're rising in nominal terms. In other words, if the Fed starts raising rates but inflation is rising at a faster pace, the net effect is that monetary policy is actually becoming looser.

That's why gold and silver prices went on a tear in the 1970s, even as interest rates rose. It was only after then Fed Chairman Paul Volcker raised short-term rates into the high teens that interest rates went higher than inflation. Only then did the metals prices finally come down.

That said, Fed and government officials currently argue that inflation is extremely low.

3. Debt crisis hits home.

In March, the federal government reached its statutory debt ceiling of more than $18.1 trillion. There's little doubt that the debt limit will eventually be raised once more. But reckless political brinksmanship along the way could rattle the markets.

Of course, when Congress inevitably moves to raise the debt ceiling again, it won't solve the nation's debt problems. In fact, it will only exacerbate them. Since the financial crisis began at the end of 2007, total worldwide debt levels have increased by $57 trillion, according to the New York Times. Economist Laurence Kotlikoff estimates the total U.S. fiscal gap to be $210 trillion at present.

In order for these liabilities to be met, untold trillions in new currency units will have to be created. That is the real debt crisis the U.S. faces -- and with it the potential for a massive inflation. (See point No. 2.)

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