Gold Turning to Kryptonite

Rodney Johnson | Friday, April 19, 2013 >>


Indignant.

Hostile.

Disgusted.

Dismissive.

These are just a few of the responses we get when we talk about the price of gold collapsing to $750 an ounce, and possibly lower in the years ahead. People enamored with the metal take any detraction as a personal affront. You might as well have slapped their mothers.

And why not?

The yellow metal was all but invincible for much of the 2000s. Even after the drop in the financial meltdown it rebounded and reached new heights.

But that was in years past. I’d imagine right now, after the big sell-off last week, these gold bugs are desperately rubbing their coins, trying to bring back the shine. The problem is that gold can crash, and has crashed in the past. Remember gold at $800 in 1980, and then gold at $280 in the late 1990s?

It’s like Superman in a room full of Kryptonite… the power is being drained away… But is this the beginning of the end for gold, as we’ve been forecasting since last year?

Not quite yet.

We think gold is likely to rebound briefly after such an irrational crash. But gold broke out of a trading range between $1,525 and $1,800 that had lasted almost two years. That is a major sign of weakness. Given our current economic woes and Japan’s recent moves toward a currency war, it seems almost certain that we will see more money printing.

However, the end IS nigh…

We’ve said this many times. As economies deleverage, gold – along with other commodities – will suffer because (brace yourself, gold bugs!) gold is not money. If you are still reading, good! Let me explain.

Money is in our heads. To claim that any small piece of paper, cotton, or metal can be a storehouse of value implies a confidence that the next person will see it the same way. The only things that don’t require such confidence are items that have their own productive value, like farmland or machines, and raw materials.

Because anything we use as money is not productive and typically not a raw material, we must all trust that other people will view whatever we use as money as valuable.

Part of what makes anything used for money less valuable is a greater supply of that money, like printing new dollars… or euros… or yen. When you do that, it drives down the perceived value of money and drives up the value of commodities and productive assets.

When the supply of money shrinks, like when we pay back our debts or a bank simply writes off a debt, money becomes more valuable. When that happens, the value of commodities and raw materials comes down.

It is this deleveraging in the private sector that we have pointed at for years in our call for lower commodity prices due to deflationary pressures.

So where does that leave those who hold gold today? Pretty much where they were a week ago.

Those who buy physical gold as a hedge against calamity can keep their holdings, as they aren’t trying to make a profit on the gyrations in the price of gold.

Those who are gold investors need to take stock of their risk tolerance and outlook. We’ve been warning for months now to get out of long-term gold investments. We stand by that and advise investors to be selling gold on any near-term bounces.

If gold can bounce back above $1,525, then there may be more potential upside before it ultimately falls, but the greater likelihood is that it continues to fall in the months and years ahead.

Yet, there is a short-term play in gold and silver… for those that are more trader oriented. Have we lost our minds? No. Are we crazy? A little. But we’re not stupid. We warned that a break below $1,525 would be fatal, and now we advise selling on the first substantial bounce. This trade is NOT one for the faint of heart, as the recent heart-stopping drops show.

We see the eventual bottom for gold around $750.

Rodney

 

 

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Categories: Gold

About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.

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