Harry S. Dent | Wednesday, October 23, 2013 >>
Gold was supposed to be the crisis and inflation hedge.
The ultimate protection for investors during bad times.
And it was those things in the 1970s when inflation went to heights not seen in centuries.
But gold is also supposed to go up as more countries print more money and debase their currencies.
That we haven’t seen this time around…
The U.S. upped the ante in mid- to late 2012 with its third quantitative easing program – QE3 – followed immediately by QE3 extended.
Then Japan unleashed the greatest QE yet… 2.5 times what we did, when you adjust for the size of its economy.
And China has been off the charts in its easing efforts and debt creation in 2013 as well.
Inflation rates have fallen from 2% to near 1% in the U.S. They continue to be closer to 1% in Europe with its recessionary economy. Only in Japan is inflation rising a little after the strongest peace-time money printing ever.
And gold fell accordingly.
So what gives here?
I believe what gives is that the markets have finally grasped the truth in our long-time arguments that gold was in a bubble and that all the money printing, stimulus and quantitative easing around the world would not result in high or even hyper-inflation.
Because private debt, which is much larger than public debt, keeps deleveraging in most countries, albeit not as fast as it would without this unprecedented stimulus and money printing.
And debt deleveraging causes deflation, not inflation, as history proves clearly.
Major deflation periods followed major debt and financial bubbles after they peaked in 1835, 1873, 1929… and again in 2007.
If governments are printing money to fight debt deleveraging and deflation – which is exactly what they’re doing – then that is the trend… and gold is an inflation hedge, not a deflation hedge.
That is why gold has been falling for most of 2013.
The chart below shows how gold peaked in September of 2011 at $1,934 and then went into a long trading range between $1,525 and $1,800. Normally such a massive rise and such a trading range would suggest a final break to new highs before peaking. But that didn’t happen. Instead gold fell below $1,525 and then crashed to $1,179 into late June.
The truth is that gold has been mortally wounded.
Do you remember how oil went up to $147 in 2008 and then collapsed down to $32 in just four months? That was thanks to highly-leveraged hedge funds and financial institutions speculating on the price of oil and then suddenly having to meet margin calls when the music stopped.
Now, the same thing is happening to gold, only to a lesser degree.
Many funds had to sell to meet margin calls between April and June 2013. Even after that wash out, every time gold rallies, it falls back again as more funds and investors cover their losses and leveraged bets.
So where to next for gold?
The next strong support in gold doesn’t come until around $700 or $740. The ultimate support is around $250 per ounce, the 1998 to 2000 lows before the bubble began.
In this long period of off-an-on-again deflation, gold will just get weaker and weaker. It may go up in the anticipation of a financial crisis in 2014, just like it did into June 2008. But when the crisis actually hits, debt starts deleveraging and deflation sets in (again like in late 2008), gold will continue its painful meltdown.
Since gold has become oversold and I see another financial crisis building, my advice is simple: Sell what gold you have left on significant rallies ahead, especially into early 2014.
We’ll look to better gauge that in our Boom & Bust newsletter, where we focus more on identifying major reversals in key markets to help you protect your assets and allow you to prosper, even in bad times.
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