There is an old rule in the market, when everyone in the market is a bull, it is time to be a bear. I think gold is going down for the following reasons:
- The economy is recovering so the global fear buyer will become fewer and fewer
- Value investors will invest in higher yeilding products; money will come out of gold and into income producing assets.
- I cannot find a bear in this market no matter how hard I try.
If you discard the 1970s and early 1980s then inflation adjusted gold has never been this high in modern history and looks over valued.
I hate buying into irrational assets and gold looks like an irrational asset. Buying gold is like buying Cabbage patch dolls or baseball cards or dollars in that Gold has value only because people believe that gold has value. Earlier when developing this viewpoint that gold is an irrational product I failed to realize how much vast quantities of gold jewelry the Indians want to buy.
- The economy is recovering so the global fear buyer will become fewer and fewer
Gold prices don't correlate that well with bad economies. Even if gold prices did correlate with bad economies while the World may do just fine, in my opinion USA has 25 years of economic pain in store for the USA. Gold prices correlate better with inflation, monetary expansion and distrust in currencies than it correlates with recessions. I see a potential for global economic growth coupled with high global inflation and distrust in the enduring value of most currencies.
If we look at August and September of 2008 we saw a bursting of the commodities bubbles leading to an unwinding of the Yen and dollar carry trades which lead to a rising Yen and Dollar and hedge fund redemptions which in turn lead to a general sell off of all asset classes in October and November.
But what burst the commodities bubble? There are semi credible conspiracy theories that say the bubble burst began with JP Morgan Chase selling paper gold that it did not own. As evidence of some sort of manipulation people pointed out that the paper price of gold separated from the price of delivered gold which fell more slowly. Why would JP Morgan Chase be allowed to sell gold it did not own? The dollar was in a steady decline that was threatening to get out of control and destabilize the world economy worse than what transpired in the fall of 2008. Also the speculators had pushed the commodity prices up to the point that it was starting to hurt the real economy. The end buyers of commodities most notably the airline industry wanted something done about the commodity bubbles.
Popping the gold bubble popped all the bubbles. I don't see the commodity bubbles as being in any way negatively impacted by the previous popping of the housing bubbles.
There are a lot of people who are bearish on America and they and they hedge funds that they invest in are who I credit/blame for the gold bubbles. These America bears and general currency / fixed income bears are use leverage from the Yen and Dollar carry trades to bet on whatever they like better than investing in America and investing in fixed income securities. Some of the money from the carry trade is going into buying Dow stocks. The Carry trade binds all these investments together and makes them all rise and fall conversely to the Dollar and the Yen.
So what happens to Gold? When people trust the various currencies again and when fixed income investments pay higher interest then Gold will fall back to it's normal inflation adjusted price range. This era and the 1970/early 1980s when the USA had just come off the Gold standard and had lost the Vietnam war and had high inflation was the other era of high gold prices. Except for a few years in the early 1980s the economy was not that bad in those days but the confidence in the stability and enduring value of the dollar was at a low that had not been seen again until the last few years. The low gold price 1989-1991 recession was as bad or worse than the mid 1970s recession but the confidence in the dollar was shakier in the 1970s.
I think Gold will continue climbing. Other commodities need the recession to end before they can rise much because unlike irrational gold the other commodities have ties to the real economy. Traditionally oil and gold rise and fall together. If the economy improves look for oil to increase in price quickly.
While I think Gold will rise and the dollar will fall I also think the governments of the world may intervene to slow the demise of the dollar again in order to maintain stability. We can't have every idiot becoming confident that they can bet on a falling dollar or the dollar will crash; so there needs to be periodic sustained upward spikes in the dollar to create enough confusion about the inevitable fate of the dollar so that the dollars decline can be stretched over decades rather than suddenly plunging. I expect that the world's leaders will periodically do something like authorizing JP Morgan Chase to sell paper gold that it does not own in order to prop up the dollar.
Firms that sold Gold they did not own may have driven gold prices up buy buying paper gold to balance their books.
I don't know if this alleged naked short selling of gold was a true story but you can find a lot written about it on the web. Unfortunately most of the writing is just unsubstantial noise.
Do we trust the dollar? Do we trust the banking system denominated in Euros and other currencies to pay out interest at a rate higher than the inflation rate? Do we want to bank in obscure currencies? If we don't trust currencies then we are at risk to inflation if we bank in currencies, so what is plan B? Stocks, real estate? Do we want to be in Real estate now? If we don't trust the American economy do we want to be in the Dow? How much of your wealth are you willing to put in the stock of foreign corporations? The Dow was supposed to be safe for people all over the world not just for Americans. If the Dow is no good and real Estate is no good and fixed income is no good, and it is not time for commodities until global demand improves, and you already have enough risky emerging market growth stocks then what is there to invest in besides gold?
Gold will go up not because gold should go up but because the alternatives are worse.
