December 5, 2022

Have Gold Investors Become Too Bullish? Ask The Same Question At $5,000

Have too many investors gotten overly bullish on gold?

After a stunning advance of almost $200 per ounce from last year’s closing price, some are asking if gold has gotten ahead of itself.  After advancing almost nonstop since the beginning of the year, gold sold off sharply, dropping by $32.50 to close in New York trading at $1725.90.

Analyst Mark Hulbert, who tracks investor sentiment as reported in the Hulbert Gold Newsletter, reports that bullish sentiment on gold has become extreme.  At the end of 2011, short term gold timers were completely out of the gold market.  The Hulbert Gold Newsletter Sentiment Index (HGNSI) registered 0.3% on December 29th compared to 51% today.  Mr. Hulbert sees the rapid return to bullishness by gold investors as a worrisome signal and notes that the HGNSI never got as high as it is today when gold previously traded at current price levels.

Mr. Hulbert notes that his indicator can be early as was the case last year.  In early December Hulbert noted that bearish sentiment was reaching extreme levels but gold subsequently plunged from $1,752 on December 1st to $1,574.50 on December 30th.

One indicator of gold sentiment that does not seem to be signaling an imminent sharp correction in gold is the CBOE Gold ETF Volatility Index (Gold VIX) which measures gold volatility based on SPDR Gold Trust (GLD) options trading.  As bearish put positions on the GLD increase, the VIX rises as it did last August prior to a sharp correction in the price of gold.  After peaking at 40 last year, the VIX is currently at 22.

CBOE Gold VIX (GVZ) - courtesy cboe.com

 

Could the price of gold correct in the short term? Yes.  Should long term investors who hold gold as a safe haven against a government that has an official policy of debasing the currency be worried?  No.

A short term correction is nothing more than a buying opportunity for long term investors.  Why would one care if gold corrects to $1,600 on its way to $5,000?  Here are a few items for consideration by those worried about a “correction” in the price of gold.

The U.S. has accumulated debt obligations and promises that are mathematically impossible to repay.  Neither future economic growth nor tax increases will be sufficient for the government to meet its obligations without debasing the value of the dollar.  The government is spending $1.60 for every $1.00 collected in revenues, half of all families receive some type of government payment and half of all wage earners pay no taxes.

The government’s “solution” for too much debt remains the same – more debt.  Here’s what Treasury Secretary Geithner said when he asked Congress to raise the debt limit in August 2009 when government debt totaled “only” $12.1 trillion.

“Congress has never failed to raise the debt limit when necessary. Because members of both parties have long recognized the need to keep politics away from this issue, these actions have traditionally received bipartisan support. This is clearly a moment in our history that calls for continuation of that tradition.”

As the debt burden approaches the day of reckoning, the proportion of the population actually working continues to decline.

Investors late to the party attempting to diversity into gold may find that it’s too late – gold may not be available at any price.

Gregor Macdonald notes that global gold production over the last decade has been below the average of the past 110 years.  Normally, higher prices will  result in higher supplies as producers rush to capitalize on higher prices.  Despite the fact that the price of gold has increased every year for the past decade, gold production has barely increased – there is simply not that much gold left which hasn’t already been mined.

 

Global gold production - courtesy gregor.us

A looming price correction in gold?  Bring it on!

Why Higher Inflation And $5,000 Gold Are Inevitable

In his press conference on April 27, 2011, Federal Reserve Chairman Bernanke dismissed inflation worries, stating that “Our expectation is that inflation will come down and towards a more normal level”.   Should we believe him?  Not if you want to preserve your wealth and here’s why.

Chairman Bernanke has a perfect record of making inaccurate economic forecasts.

  • Bernanke, March 2007, prior to the historic housing crash said,  “At this juncture . . . the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained.”
  • Bernanke, February 2008, prior to the banking crisis that almost resulted in the collapse of the entire U.S. banking system  said, “I expect there will be some failures. I don’t anticipate any serious problems of that sort among the large internationally active banks that make up a very substantial part of our banking system.”
  • Bernanke, June 2008, prior to the worst recession and job losses since the 1930’s, said the danger of the economy falling into a “substantial downturn” appears to have waned.

Even if the Fed was able to keep inflation at a “benign” rate of 2% a year, the long term effects on savings are devastating.  Over ten years, a 2% inflation rate reduces the value of $100,000 to $82,034, resulting in an 18% loss in purchasing power.

According to the Bureau of Labor Statistics, inflation averaged 3.4% since 1980.  At the beginning of 1980, one dollar had the same purchasing power as $2.86 at the end of 2010.

The cost of living has spiraled upwards since the early 1970’s, correlating perfectly to the point at which the value of the dollar was decoupled from gold.  In 1971, the United States stopped exchanging dollars for gold to foreign official holders of dollars and the dollar gold standard was officially ended in 1973.

The Fed’s policy of pushing easy credit for the past 30 years to fuel economic growth has left Americans swimming in debt.  The housing collapse and declining incomes have resulted in millions of mortgage defaults and underwater homeowners.  The Government’s attempt to bailout a collapsing economy and over leveraged banks and consumers has resulted in trillions of dollars in new debt and a $1.5 trillion deficit.

Government debt has exploded to the point where the solvency of the U.S. Government is now being questioned.  Large tax increases to erase the deficit would spin the U.S. into a deep recession.  The President and Congress lack the political will to cut spending.  The U.S. has spent and borrowed itself to the eve of financial ruin and must “inflate or die” at this point (see Why There Is No Upside Limit For Gold and Silver Prices).

The Fed, with the experience of two money printing campaigns already under its belt, will have no problems extending this practice.  As Bernanke noted in 2002 before he became Fed Chairman, “The U.S. Government has a technology, called a printing press, that allows it to produce as many U.S. dollars as it wishes at no cost”.

The Fed’s cheap money policies and concerted efforts to debase the value of the dollar are just beginning, and that means the biggest move up in precious metals is still in front of us.  My minimum long term forecast for gold remains at $5,000 per ounce and silver at $170 per ounce.