If you ask Rodney’s wife how much physical gold she owns, she will slowly and innocently shake her head and say…
It’s the only lie Rodney has known her to repeat with dedication.
And that’s where the fight starts.
When Harry is asked about gold – and he’s asked often – he’ll tell you to sell it all. Every last piece of it. “It’s useless, unless you like losing money,” he likes to say.
As the investment analyst on the team, I see (and help answer) all the questions and comments we get from our paid subscribers, and we receive more questions about our views on gold than any other topic (real estate is probably the second most popular topic, but that’s a discussion for another day).
And with gold losing as much as 39% since 2011, the two questions we’re getting the most are:
Is it time to buy gold?
And… Do you still believe gold will melt all the way down to $750 an ounce?
So here’s what we’re telling subscribers…
Yes. We stand by our forecast that gold will collapse to $750 an ounce. In fact, Harry believes gold could drop even lower than that… we’re talking $250 here.
Look. We understand that it’s easy to fall in love with gold. It glitters and conjures feelings of wealth and power. In many cultures, it’s a status symbol. In others, it’s a store of “rainy day” value.
But ultimately gold is just a commodity… like oil, corn and pork bellies. Fifty-one percent of gold is used for the simple purpose of making jewelry. Another 12% is used pragmatically, to make technological hardware.
Despite the fact that roughly two-thirds of gold is used for commercial applications, its price is largely driven by other factors. That’s because — right or wrong — gold is also viewed as an investment asset and as a potential currency hedge against fiat money.
While gold garnishes headlines as a major financial asset class, only 18% of the world’s gold is used for investment purposes. This is a different kind of gold — gold for speculative returns.
And while, for decades, at least 50% of Americans have owned stocks, it’s estimated that only 1% to 4% of Americans own gold as an investment. Sure, gold is capable of producing returns through capital appreciation. Buy it at $1,200… sell it at $1,250… and you certainly make a profit of $50/oz.
But gold — unlike many stocks, bonds and investment trusts — produces no income for its investors. The only money to be made in gold is when today’s buyer is willing to pay more than yesterday’s buyer.
Others still buy gold for its supposed potential as a currency. But these gold buyers are getting it all wrong.
Gold is not money. Nor will it become money in the foreseeable future.
And gold is seen as a rainy day hedge. History has shown gold performs well as an investment leading up to major financial crises. But pay special attention to those last six words, “leading up to major financial crises.” It’s the anticipation of widespread financial panic, chaos and destruction that motivates gold buyers to stock up on the yellow metal that’s seen as the ultimate safe haven and defense strategy against financial Armageddon.
But gold’s star performance in the lead-up to a financial crisis begins to crumble during and after the financial Armageddon. That means that once financial calamity strikes, gold does nothing to shelter investors from the carnage. In fact, it will only help to exacerbate their losses.
Then there’s the view of gold as an inflation hedge… all good and well when inflation is the trend of the day. The trend today is actually that of only mild inflation to mild deflation (more on that another day.) Certainly nothing for gold bugs to hang their hats on.
Plus, the 29-30 year commodity cycle peaked in 2008. We are now moving through the downturn in this cycle and we have at least another nine years before the market turns back up again.
Not to put too fine a point on it, there are many factors working against gold. But that’s not to say we believe gold’s plummet will be a one-way affair.
It’ll be more like a paratrooper…
He jumps out of an airplane and drops like a rock. When he opens his parachute, his fall is immediately arrested and he even rises a bit before continuing his decent. On the way down, any draft of rising warm air can lift him a few meters. Then he’s back to falling…
That makes answering the question, “Is it time to buy gold?” an easy one.
The answer is NO!
Any attempt to forecast gold’s next bounce is a fool’s errand. The bounces are swift… so if you’re a day late, you’re left behind. And the bounces, thus far, have been mild… so you’re risking a lot of money in hopes of gaining just a little.
While trying to pick tops and bottoms is the ego-driven draw of some contrarian investors, trading WITH the trend is typically the safer, more lucrative strategy.
And ever since gold broke below $1,550 – as we warned Boom & Bust subscribers it would, in our September 2012 issue – the trend for gold has clearly been down.
Repeat after me: Don’t fight the trend!
What’s more, some simple Fibonacci analysis shows gold’s correction is likely not over. That’s because long-term trends – like gold’s bull run from $470/oz. to $1,940/oz. – typically retrace as much as 61.8% of the move. That puts gold at about $995/oz.
More significant corrections – as are often seen in bubbled markets… and make no mistake, gold was a bubble market – often retrace more than 76% of the gains made during the good years. That puts gold right around $750/oz.
Any way you slice it, this is not a gold bug’s market. Steer clear of the yellow metal unless you’re betting against it!
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