Are You Betting Your Assets on Gold? Big Mistake

On April 25, 2012, Porter Stansberry interviewed me on his radio station. It was one of the more interesting discussions I’ve had with a fellow newsletter editor. Definitely worth a listen.

It also resulted in a 10-year bet on the fate of gold.

You see, Porter and I have similar views on the unsustainability of the greatest debt and financial asset bubble in history. But, as with Peter Schiff and I, we have different views on gold.

I say that gold is NOT the safe haven — rather the U.S. dollar is — as was proven in the last financial meltdown in late 2008, when gold crashed 33% and silver 50%. And I expect gold prices to continue to melt all the way down to as low as $250 to $400 an ounce.

However, Porter, Schiff, and many others, say gold is the ultimate safe haven. They see gold prices soaring to $5,000-plus as governments print more and more money to stave off the inevitable financial crisis.

My response is simply that governments have been printing at unprecedented levels for over five years now and there is little official inflation… Wake up!

So, during that interview, Porter bet me $1 that gold would be higher 10 years later, by late April of 2022. Hell yeah! I’ll bet against that.

At the time the bet was struck, gold was around $1,650, and days after that, I gave a major sell signal for silver and gold when silver retested its last bubble high in 1980 at $48. Silver is down 60% from that sell signal today. Gold is down 22%.

Gold peaked at $1,934 shortly thereafter in September 2011. Since then, the shine has come off the yellow metal. It melted down sharply from $1,800 an ounce down to $1,178 between late 2012 and early 2013.

What caused that crash? Well, I’ll get to that in a minute, but first, let me explain why I’m winning this bet, so far (and why I’m confident I’ll come out the winner in 2022)…

Look at this chart.

See larger image

It shows you the incredible run-up in gold, especially from late 2008 into late 2011.

More important to note, however, is that gold bottomed out at around $250 per ounce between late 1998 and 2001. Its rise to the peak of $1,934 in 2011 represented a 7.7 times gain in just 10 years.

I don’t know about you, but to me, that’s a bubble… and bubbles ALWAYS crash, more often than not, back to their original starting point (and often lower).

Gold’s greatest run came from late 2008, when central banks started unprecedented quantitative easing (QE). It went up three times in just under three years: bubble, bubble, bubble.

Now note the sideways pattern gold traded in from late 2011 into early 2013. The metal gyrated in a channel between $1,525 on the low-end and $1,800 on the high-end.

Normally a pattern like that, after such an exponential thrust, would indicate that one more rally to new highs was in the cards. I even thought gold could have one last hoorah to $2,075 or so before finally succumbing to the bubble pressure.

But that didn’t happen. Gold broke the very critical support at $1,525 in very early April 2013 and then plunged sharply, as I expected.

So back to that question: Why the sudden meltdown?

Because gold buyers finally understood what I’ve been saying for years: Unprecedented money printing is NOT going to create major inflation, and certainly not hyperinflation. We’re in a deflationary environment of debt and financial asset deleveraging as in the last winter season from 1930 to 1942.

In late 2012/early 2013, the U.S. escalated QE3. Japan followed with a tripling of its stimulus efforts… but official inflation fell from just over 2% to 1% in the U.S.! So the markets finally realized that money printing doesn’t necessarily lead to inflation in periods of debt deleveraging.

Since the crash, I’ve been predicting that gold would break back up to $1,430 (where it first bounced), and possibly a bit higher to $1,480 or so before crashing again… this time going down to somewhere between $810 and $700.

I think it’s very unlikely it will get back to $1,525, which is now major resistance. But if gold can get back above $1,525 and stay there by early 2015 or so, then Porter has at least a shot at winning our bet.

For now, it looks like I’m on track to win that $1 come April 25, 2022.

I suggest that anyone who doesn’t follow an investment system, like the one Adam applies to our Boom & Bust model portfolio — anyone who has a set-it-and-forget-it mentality with their investments or who wanders around the investment world without expert guidance — should sell their gold investments if the yellow metal hits $1,430 in the months ahead, which I think is likely, as inflation trends tend to follow on a lag to the economy and could still advance a bit in the next several months before deflation rears its ugly head again in the next larger slowdown and financial crisis.

Don’t get greedy and hold out for more. As we’ve already seen, gold can plunge rapidly and painfully now that its mask of merely a crisis hedge has been lifted. It is ultimately an inflation hedge — and significant inflation isn’t going to happen for a long time in this deflationary winter season, which is likely to worsen dramatically in the next six years.

Mark my words: Gold is headed for $250 to $400 an ounce in the next decade, and $700 to $810 by late 2016.

Porter and I bet a measly $1 on that. But are you willing to bet a substantial part of your assets on gold soaring in a deflationary season? I wouldn’t. Maybe a little bit as a crisis hedge play. And some silver coins would be much more effective in a temporary crisis where barter becomes an effective strategy.

I still think that shotgun shells and small bourbon bottles would be better!


Harry

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Categories: Gold

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.

Comments

  1. Sumtyn Wong 2 July, 2014, 10:26

    Nice Article it may very well play out that way. However i think there may be one serious flaw in the reasoning. Inflation is NOT low. It is indeed being presented as such even though if inflation were calculated the way it was in the 70’s it would be around 10%. Real inflation is being hidden very cleverly.
    Also i would suggest that even the fake inflation numbers presented as a ratio to GDP growth would show that even the fake numbers are not really all that low.
    I also find if strange that the place to be would be the US Dollar…at a time when the US is absolutely out of money..broke. 17 Trillion in debt, 230 Trillion in Unfunded liabilities….Really ? The Dollar ?

  2. endthefed76 26 August, 2014, 15:56

    I agree. The US debt level is the key. Since 1971, when the gold window was closed, the cheapest gold has been in relation to the ‘debt based’ dollar was around 2001. It was ‘half off’ at that time, and an excellent buy. Right now, it is discounted about 20%. At the high(2011), it was overpriced by about 45%. To get down to $250/oz., and stay there, would require an 85% reduction in outstanding debt from today’s level! An 85% collapse in US debt would mean the end of the dollar has already passed. So, if the dollar has disappeared, where’d my savings go? Into the black hole of imploding debt.

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