Gold Markets Aren’t So Golden Anymore

I have been forecasting — more than anyone — that gold markets would NOT be the savior everyone was hoping for. It would NOT be the hedge against the inevitable next crash ahead. (A crash that governments have delayed with their unprecedented money printing, but that’s another story for another time.)

Turns out I’m right (so far)…

Gold hit $1,934 in September 2011, then it collapsed rapidly, breaking below its two-year trading range of $1,525 and $1,800. After that, its decline accelerated, slamming the precious metal into $1,178 an ounce.

Who would have expected that to happen? Especially in an era of ever-escalating money printing — first by the U.S. with QE3 and QE3-plus, and then by Japan, who now stimulates at three times the rate of the U.S. (when you compare economy sizes).

Everyone was expecting inflation… even hyperinflation.

Well, I wasn’t and I did. I expected gold to suffer and, as I believed it would, it was mortally wounded by the fact that stimulus escalated while U.S. inflation rates fell from near 3% to near 1%. No matter what the government did, growth and inflation remained suppressed.

Even in Japan, despite the significantly bigger hammer it’s using in an attempt to create inflation, growth and inflation has remained muted.

Gold Markets Are Bad News

Welcome to the deflationary world I’ve been warning you of for years (maybe even decades).

And there’s something important you need to know about this deflationary world…

The trend that has thwarted central bank efforts to stimulate economies will soon overwhelm us, and our wannabe saviors will be caught with their pants down.

This will unfold when some geopolitical event slams into us, like a collapse in Chinese real estate prices… or a sudden slowing in Germany… or a further slowing in the real estate recovery in the U.S.

(Should none of these events come to pass, I expect stock markets will simply continue to edge up because, for now, there’s simply nowhere else for investors to go… but again, another story, another day.)

I have been comparing notes on gold with Adam O’Dell, our chief investment strategist, and we agree that the precious metal just keeps on disappointing, despite major oversold readings after the crash into early 2013.

We don’t see this changing.

I was expecting gold markets to rebound back to its 2013 highs of $1,430, but that looks unlikely now.

There was also a declining triangle pattern that suggested gold might rise back, just one more time, to $1,350, after retesting its $1,178 resistance level. While this is still a possibility, it looks less likely now since prices have retreated and we’ve witnessed a death cross on the charts, with the 50-day moving average crossing below the longer term 200-day moving average.

Frankly, this is not an easy pattern to predict, particularly in such a politically-sensitive precious metal. But I believe that the downside risk, which can be sharper and more painful than what we saw in early 2013, is simply not worth the minor upside potential if the metal is able to muster enough strength to reach $1,350 or higher.

In addition to all the technical indicators that have led me to my conclusions about the future of gold, there’s another warning sign that has me worried about the metal’s ability to pull off any kind of rebound…

I recently read an article in Barron’s on the key picks of its “dream team” of analysts. The majority of them have gold as a buy.

That is not a good sign!

Most investors are now convinced that gold will go higher. Few, if any, see it going much lower. That means there will be many more sellers than buyers ahead when something goes wrong for gold. So when gold prices slide, many more investors will get hurt.

If you’re one of those people holding on to gold and silver investments as an inflationary or crisis hedge, I say it’s time to consider selling.

Recall that gold and silver markets crash in late 2008, when the last financial crisis enveloped the world. Sure, it went up after the stock market peaked, but it crashed when it encountered deflation instead of inflation.

I think that this next time around, gold and silver won’t last as long, as a crisis hedge, as it did back in ’08.

In fact, as I said earlier, I believe that the gold and silver markets could crash again at any signs of the next crisis.

I continue to forecast that gold could see $700 by late 2016 or early 2017, and that it may even go as low as $250 to $400 by early 2020 or beyond.

So be forewarned: Gold looks like it has more downside than upside to me, even though there are a number of scenarios that could play out in the next year. At this time, I would be more a seller of gold and silver than a buyer.

And remember: Gold is not the way to play a deflationary downturn. The U.S. dollar is the hedge you need. Hoard that instead.

In upcoming issues of Boom & Bust and The Leading Edge, we’ll be telling you about other ways to hedge against the next crisis. Be sure to read your issues as we release them. If you’re not yet a subscriber, join us now so you, too, can be prepared.

Harry

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Categories: Economy

About Author

Harry studied economics in college in the ’70s, but found it vague and inconclusive. He became so disillusioned by the state of the profession that he turned his back on it. Instead, he threw himself into the burgeoning New Science of Finance, which married economic research and market research and encompassed identifying and studying demographic trends, business cycles, consumers’ purchasing power and many, many other trends that empowered him to forecast economic and market changes.