3 Reasons The Rise In Gold And Silver Is Only Temporary

There has been a rally in gold and silver over the past week that has been long awaited by the precious metal bulls.

SPDR Gold Shares (GLD) is up more than 3 percent for the last week of market action. Over the same time period, iShares Silver Trust (SLV), the exchange traded fund for silver, has rallied by over 4.4 percent.

Gold and silver bulls should not be too excited, however, as there are three major reasons that the rebound will prove to be temporary, as have the others in the post-Quantitative Easing III era.

The most important factor: Investors are driving the financial markets now, not speculators.

After Quantitative II was announced in August 2010 by Federal Reserve Chairman Ben Bernanke, in a speech at the Jackson Hole economic summit, commodity prices soared. Speculators reacted to the massive amounts of paper currencies being created without corresponding economic growth by piling into gold, silver, oil, copper and other hard assets.

A year later, the United States was downgraded by Standard & Poor's, lending more credence to buying gold and silver as a safe haven asset, while fleeing dollar assets. But the U.S. economic recovery from the Great Recession has proven to be for real.

As a result, after Federal Reserve Chairman Bernanke announced Quantitative Easing III in September 2012, gold and silver initially rallied. Shortly thereafter, however, the prices fell. Over the last year, iShares Silver Trust is over by more than 27 percent. SPDR Gold Shares is down more than 21 percent for the last 52 weeks of trading. Restored confidence in the American recovery has been very costly to those buying gold and silver assets.

Oil has also replaced gold and silver as a safe haven asset.

The gold and silver markets do not have the depth to handle the massive amounts of currencies being created by quantitative easing measures around the world; the oil market does. And while virtually all of gold is for investing or jewelry, as is about half of all silver, oil goes entirely to industrial usage.

Not only does the oil market have the depth to handle the investment capital seeking a haven, oil is actually used. By contrast, gold and silver always remain, vitiating the basic forces of supply and demand. Therefore oil rises in value based on economic consumption, while gold and silver only rise due to speculative buying.

A third reason is that the two biggest consumers of gold, China and India, are focused on developing more of an international role for each other's currency.

That is particularly true of the People's Republic of China. If the government of India and China were to focus on gold as a holding, it would greatly damage their attempts to further the usage of the fiat currency for each developing nation.

It is a different world for investors than it was back in August 2010, when gold and silver soared in the QE II era. The Dow Jones Industrial Average (DIA) was barely above 10,000 in late August 2010. The next year, after the S&P downgrade, the Dow was around 10,700 in September 2011. Now it is about 50 percent higher. Much of that rise has come at the cost of those owning gold and silver assets.

BY Jonathan Yates