Gold: “I’ve Fallen and I Can’t Get Up”

Gold is supposed to go up when central banks print limitless money and debase their currencies.

We’ve seen the U.S. commit to QE3 and a more aggressive QE3-plus from mid- to late 2013 or as long as it takes to get employment down to 6.5%… and that could be a very long time by our analysis of demographic and debt trends.

China committed to a major new stimulus plan.

Japan is buying “unlimited” bonds to push the yen down to increase exports and to create minor inflation so consumers will spend rather than hold back.

The ECB is likely to be next to offer some new form of money printing to stimulate the weakest economy in the world.

And central banks are reported to be buying more gold.

So, why the hell is gold falling?

Because the two sources with the greatest demand for gold aren’t the growth kings most analysts thought they’d be.

India is the number one consumer of gold. China is a close second. Their combined purchases alone, account for 52% of gold demand, and the great majority is for jewelry, not investment.

But on the one hand, China’s economy slowed in 2012 after its government clamped down some on real estate speculation, which is why it has vowed to stimulate again. On the other hand, India has seen rising inflation and a falling rupee that has dampened its demand for gold imports.

Gold saw lower demand for the first time in a long time in 2012. So it’s not surprising that the precious metal’s price has been falling.

But there is another cause for gold’s fall…

Do you remember the meteoric rise of oil to $147 in mid-2008 and then its great bubble burst down to $32 in four short months? That was the handy work of speculators… and they did it again when they drove gold to all-time highs last year…

See that spike in gold in the chart? That was hedge funds speculating on gold at high leverage, like 30 – 40 times. They bid up the price way beyond normal supply and demand factors, and then they had to sell to cover margin calls when it finally tanked.

This triggered a bout of irrational selling. Under those circumstances, you don’t wonder if it is time to buy as the value finally comes back down. You just keep selling to deal with redemptions for your investors and margin calls.

There have been major commitments to gold from hedge funds, especially John Paulson’s Gold Fund. Because of redemption demands and margin calls, he’s being forced to sell.

This is why governments should never let investment funds invest at 30 – 50 times leverage. NEVER!

Gold has been a major focus for speculation and now that is breaking down. That’s why the gold price is not reacting the way it should as unlimited stimulus crack is shot into investors’ arms.

The important question now is: where does gold go from here?

Naturally, everyone is very bearish on gold. Don’t be blindly swayed by the dumb money. Instead, think like the smart money. This is the time to buy rather than sell gold. Gold has major support from three bottoms around $1,525 and we expect it to rally one last time.

We may just see a minor rally back towards $1,700. But if gold breaks above $1,800 this year, we could see a major new high, as far up as $2,080 before it finally begins its collapse to $750 (which is likely to unfold around 2014 to 2015). That would suggest some major financial crisis building. If gold does break much below $1,525 near term or down the road, then it has likely peaked for a very long time.

But stay nimble and choose your gold investments carefully. And don’t listen to the media and pundits. They’re not on your side. They’re just blindly following the crowd… falling victim to the human model of forecasting (as I mentioned last week). And that’s not where you want to be.

Harry

 

 

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Yesterday, I examined the relationship between stocks and bonds. Today, let’s look at another cornerstone inter-market relationship: gold and the U.S. dollar.

 

 

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Today real incomes of the middle class are 5% lower than they were in 1970 and 12.4% lower than in 2000… when they peaked! How could this be?

In our new infographic What Killed the Middle Class?, we take a look at some shocking numbers to show how bad it’s become and what has been fueling this middle-class revolt.

 

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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.