(By Michael Vodicka) The economic and stock market recovery in the last four years has been driven by record amounts of monetary stimulation from central banks all across the world. Even the Fed itself, the most powerful central bank in the world, admits that 40% of the stocks market gains in the last four years have been driven by its monetary stimulation program called QE (quantitative easing).
So when Fed Chairman Ben Bernanke announced this spring that he was considering tapering his $85 billion in monthly bond purchases that have been keeping interest rates artificially low for the last four years, the market was not very happy. It was a lot like telling a spoiled child that his or her birthday party was ending, and the spoiled child falling to the ground and throwing a temper tantrum.
[Related -SPDR Gold Trust (ETF) (GLD): What Will Move Gold As Ukraine Crisis Eases?]
Stocks, bonds and gold all dropped lower on the news. The market has become addicted to easy money, and the notion of that easy money going away does not make the Street very happy.
But nowhere has that pessimism been more pronounced than in the gold market. Gold had been the rock star asset of the entire market for over 10 years, gaining more than 500% from 2000 to 2011. But since topping out in the fall of 2011, and fueled by recent speculation over the Fed scaling its monthly bond purchases, gold and gold miners have been absolutely pummeled. Anyone who has entered the gold trade at any point in the last two years has suffered huge losses.
The SPDR Gold Shares (NYSE: GLD), an ETF that tracks the price of gold, is down 29% in 2 years, 20% in the last 12 months and 24% in 2013.
[Related -SPDR Gold Trust (ETF) (GLD): Is It Time To Buy Gold?]
But things get absolutely brutal with the gold miners. Market Vectors Gold Miners ETF (NYSE: GDX) is down 60% in 2 years, 42% in the last 12 months and 48% in 2013.
The junior gold miners are even worse, with Market Vectors Junior Gold Miners ETF (NASDAQ: GDXJ) down 75% in the last two years and 55% in 2013.
As you can see, gold went from being the hottest trade on the Street for over a decade to being a death trap for any investor stepping into the market in the last two years.
That has many investors throwing in the towel on gold. Although it does seem like the gold trade has died a painful death, here is what every single investor needs to understand about the economy, the central banks and gold.
The central banks are not going to let the market crash. In fact, they are not even going to allow the economy to contract. And right now, Europe and the US are dangerously close to recessions while China continues to see slower growth.
Just last week, both Goldman Sachs (NYSE: GS) and JP Morgan Chase (NYSE: JPM) slashed their Q2 GDP projections to 1%, which is considered stall speed and dangerously close to a contraction.
The market is totally addicted to the Fed's easy money. Without that stimulation, the economy will absolutely go back into a recession. I expect the economy to show additional signs of weakness in the next few months as energy prices continue to rise while wages remain low. And when that happens, the central banks of the world will be quick to respond with another blast of monetary stimulation. And that will send prices of precious metals soaring as the market comes to terms with the fact that inflation is the easiest path out of the tsunami of debt that the world is drowning in.
The Fed is not going to allow the economy to contract. And with Q2 GDP projections trending at just 1%, it is already dangerously close to a recession. Any hint of a contraction will give the Fed and other central banks all the justification they need to not just maintain QE programs, but actually expand them. And when that happens, it sets the foundation for a huge reversal and rally in precious metals and precious metals miners.*For more top stock picks and analysis, check out a 4-week free trial to Michael's premium newsletter the iStock Growth Trader. The iStock Growth Trader is loaded with the hottest trends, the best stocks and detailed analysis that will keep your portfolio one step ahead of the game.