Darren Pollock is a manifestly bright fellow who earns his daily bread as portfolio manager and principal of Cheviot Value Management out in balmy Santa Monica, Calif. Darren dropped us a note recently in response to one of our recent scribblings on gold in which we suggested that what the yellow metal needed most was a good old fashioned shakeout that would send the hedge funds and the rest of the fast-money crowd fleeing and set the stage for a restoration of gold’s investment allure.
He didn’t quarrel with our diagnosis. Rather he wrote to point out to us that just such a shakeout was already in progress, and while gold suffered an attack of indigestion from publication of the minutes of the Fed’s December meeting, a true gold bull wouldn’t be overly perturbed because he realized that “we’re in the middle of a monetary stimulus marathon. This is no sprint.”
Darren claims that knowledgeable observers of Bernanke’s stewardship of the Fed knows that he is adamant about a few things: not repeating the premature withdrawal mistakes of policy makers during the Great Depression, fomenting higher real-estate prices via lower mortgages, and “creating a wealth effect in one’s 401k through higher share prices.”
He notes that since the Fed’s first QE four years ago, there’s a better than 90% correlation between the expansion of the Fed’s balance sheet and the price of gold. And since the Fed is on pace “to ratchet its asset base higher by more than $1 trillion this year,” if the correlation holds, gold should fetch something around $2,400 before 2013 calls it quits.