We always get questions about gold.
And they typically come down to a couple of questions: “Can you tell me why gold would keep going down when central banks continue to print money like crazy?”
Or: “Isn’t gold the only real currency?”
To the currency issue:
1. Try to go buy something locally with gold coins from bread to a new car.
2. Gold is no longer expanding in line with the global economy like technology and services are.
3. All the gold in the world would fit into an Olympic-sized swimming pool.
Gold was a great standard for monetary systems up until the industrial revolution when it was a shining example of the commodity economy — a very concentrated value per weight and size.
Today, it isn’t representative of the information-based economy and it’s too costly to be a medium of exchange. What does it cost to produce a dollar? Maybe a couple of cents?
What does it cost to produce a dollar’s worth of gold?
New Currency Options
Now we need a new standard, but one hasn’t yet emerged. Although it will likely further down the road and probably in the vein of digital currency and the bitcoin concept.
But bitcoin ain’t it either at this point, as it is too volatile and unproven. And gold will not be the new standard either.
What we do need is a standard for money creation that limits it more in line with the economic growth as the bubbles of this era and unprecedented money printing have clearly demonstrated… and wait until these great bubbles burst!
The new standard is more likely to be a combination of personal credit valued in real time digitally, and corporate and country credit likewise, depending on ever-changing credit quality.
First, I’ve forecasted that gold was extremely oversold after its fall to below $1,200, in late 2013 and then again into late 2014. I’ve also been expecting a bounce to somewhere between $1,340 and $1,400 — and that appears to have begun back in early November.
But the primary trend for gold is the same as that of the overall commodity markets. It’s headed down over the next several years, with an ultimate price target as low as $250 where it bottomed in 2000 and the last bubble began.
We’ve been forecasting for many years that gold is an inflation hedge primarily and a crisis hedge secondarily. This isn’t an inflationary era despite unprecedented money printing since late 2008 due to demographic decline, debt deleveraging and excess capacity created from the bubble era.
Historically, debt and financial asset bubbles always lead to deflation when they burst, not inflation. Unprecedented money printing has been required to simply offset deflation and hold off another great depression.
Most didn’t believe us when we said that at first, but now it should be obvious. The chart below shows the story.
Gold bubbled up along with most commodities in the bubble boom of the Roaring 2000s. However, it didn’t protect investors when the financial meltdown accelerated in the second half of 2008.
It fell 33%, and silver dropped 50%, while the U.S. dollar surged up 27%. The dollar was the safe haven as we predicted.
Gold was one of the few commodities to surge to new highs in September of 2011 as central banks went nuts printing money to save financial institutions and to rekindle the bubble. Investors naturally thought such unprecedented money printing would create inflation, and even hyperinflation on a lag.
Guess what? It didn’t… even after six years.
Gold collapsed in early 2013 out of a three-year trading range that should have broken out to the upside after rising so strongly into a peak of $1,934. Such surges followed by sideways trading almost always continue up in the same direction to a final bubble peak before they collapse.
But the big surprise instead was that inflation fell in most developed countries in 2013 even after the U.S. accelerated with QE3 and Japan went off the reservation with stimulus to follow.
The key insight is that central banks only create a minor amount of the money in the economy. Money and wealth are created by fractional reserve money creation through loans (at 10% reserves against deposits) and by appreciation of financial assets.
If most of the money created went into loans by banks then inflation would be a real threat, but that’s not what happened.
Massive global quantitative easing (QE) of around $11 trillion since late 2008 has substituted for the lack of lending and instead fed a final speculative bubble in financial assets… no inflation, just greater bubbles.
Gold was expecting inflation, so it collapsed dramatically from $1,800 to $1,180 into late 2013. It traded sideways in 2014 and made slight new lows in early November around $1,150.
It’s due for a more substantial bounce, but there is little chance that it’ll break back up into that long trading range between $1,525 and $1,800 after it broke out of it so conclusively. Gold has gotten some extra impetus recently from the ECB printing surge to offset the tapering of the U.S. due to the currency volatility and terror surge in Europe.
This could last for months, but not years.
I expect gold to rise toward $1,400 and then collapse again. The next stop is the support at the 2008 low of near $700. I see that likely by early 2017, if not earlier.
Yet, the ultimate support is where the bubble began in 2000 around $250, or $400 at a minimum where the last two support lines come through in the chart.
The chart above strongly argues that the break below $1,525 was a sign that the gold bubble was over! Gold bugs have still not accepted that and are still predicting new highs ahead, as high as $5,000 or more.
Gold peaked longer term with the broad commodity price peak in 1980, and it has peaked with the broad commodity price peak between mid-2008 and early 2011.
We gave our strongest sell signal for gold and silver on April 25, 2011 when silver peaked at $49 and gold was just below its final peak of $1,934.
If you didn’t heed us then… listen now and sell or lighten up. It’s more likely that it will have a continued rally in early to mid-2015 to $1,340 to $1,400. Then again, if gold disappoints rapidly again, it’ll signal a new low around $700 when it breaks below $1,150 conclusively.
Sell on this rally ahead and don’t wait for that next break of $1,150.
We have to give up this concept that gold is money. It was for a long time, but it can’t be in the future, and it would be too expensive and limiting if it were.
Ahead of the Curve with John Del Vecchio