May 28, 2024

The Bull Market In Gold Is Dead

Gold coinsApril was a brutal month for precious metal investors.  Gold ended the month down almost 8% and silver prices tumbled almost 13%.   The sell off continued in May with gold down another $60 per ounce to $1,412 and silver down $1.55 to $22.87 per ounce at mid month.

With investors already nervous, two mainstream news organizations today did the equivalent of yelling fire in a theater crowded with gold and silver investors.

Both Bloomberg and The Wall Street Journal published extremely bearish articles on gold which essentially proclaimed the death of the gold bull market.

“Gold is going to get crushed”

Gold will trade at $1,100 an ounce in a year and below $1,000 in five years, according to Ric Deverell, head of commodities research at the bank. Lower prices are unlikely to lure more central-bank buying, said Deverell, who worked at the Reserve Bank of Australia for 10 years before joining Credit Suisse in 2010.

“Gold is going to get crushed,” Deverell told reporters in London today. “The need to buy gold for wealth preservation fell down and the probability of inflation on a one- to three-year horizon is significantly diminished.”

Investors are losing faith in the world’s traditional store of value even as central banks continue to print money on an unprecedented scale. Bullion slumped into the bear market last month after a 12-year bull market that saw prices rise as much as sevenfold. Gold is a “wounded bull,” Credit Suisse said in a Jan. 3 report.

“When gold is going up, it looks like a great idea to buy more gold,” Deverell said. “And when it’s going down, do you really think risk-averse central bankers are going to try and catch the knife? No.”

A surge in demand for bars, coins and jewelry following gold’s drop to a two-year low in April is temporary, Deverell said. The U.S. Mint said April 23 it ran out of its smallest gold coins and Australia’s Perth Mint said volumes jumped to a five-year high. India’s bullion imports may surge 47 percent to 225 tons in the second quarter to meet consumer buying, according to the All India Gems & Jewelery Trade Federation.

“This is bargain-buying,” Deverell said. “It’s like when you have cash for clunkers in autos, you bring forward activity, but it’s not a massive addition to buying.’



“The bears are mauling gold”

The metal fell for a sixth consecutive trading session on Thursday, as investors continue to flee toward assets that promise higher returns.

The characteristics beloved of “gold bugs,” the sizable army of large and small investors who swear by the metal, are precisely what bears are feasting on. Unlike most other assets, gold doesn’t offer a steady return, or yield, and it is often seen as protection against inflation or currency devaluations.

At present, however, global economic growth is sluggish, interest rates in many developed countries are at or near record lows, and investors of all stripes are scrambling to find higher-yielding assets.

“There’s basically no inflation, equities are taking off, and we’ve got a strong dollar,” said Fain Shaffer, president of Infinity Trading Corp. in Medford, Ore. “All of those are just eroding away the investment value of precious metals.” Mr. Shaffer this week recommended his clients bet on lower gold prices.

On Thursday, bears seized on a World Gold Council report showing that total demand for gold fell 13% in the first quarter, to a three-year low of 963 tons in the period.

Other investors are taking the opposite view. John Workman, chief investment strategist with Convergent Wealth Advisors, said the firm late last year recommended that clients trim their gold holdings by about 25%. He cited gold prices that have stagnated despite more stimulus from the Federal Reserve in the form of asset purchases, the same money printing that galvanized gold bugs after the financial crisis. Falling prices were a signal that many investors just weren’t concerned anymore that the stimulus measures would stoke inflation and weaken the dollar.

To sum things up –

  • it no longer matters that central banks everywhere are printing money on an unimaginable scale,
  • the world economy is doing fine and will continue to improve,
  • gold, used as a currency and safe haven for 5,000 years, is inferior to fiat paper currency,
  • returns are better in stocks and bonds,
  • monetary stimulus via central bank asset purchases will propel the world into sustained economic growth,
  • there is no inflation and
  • investors want assets with yields.

Price fluctuations may not make much sense in the short term, but long term precious metal investors know where things are headed – see Why I Will Always Own Gold.

Gold Bull Market Could Last Another 20 Years With $12,000 Price Target

Bull markets are born from underlying macro economic trends that take decades to fully play out.  The bull market in gold has lasted barely ten years, yet analyst after analyst from the conventional press argue vehemently that gold is in bubble territory and dangerously overpriced.

The voices proclaiming a “gold bubble” do not understand why gold has appreciated for ten years, have never owned gold and have kept their clients out of the best performing asset class of the past decade.

The has previously argued that given the current fiscal, political and monetary circumstances, there is currently no upside limit for the price of gold.  Those exiting the gold market now will be missing the most explosive and profitable part of the gold bull market.

If the gold bull market duplicates other major bull markets, investors in gold can look forward to decades of continued price appreciation.  Consider the duration and price appreciation of the following asset classes.

United States Housing Bubble

The bull market in housing prices began in the early 1970’s.  The nominal price of a house rose from $25,000 in 1972 to $250,000 in 2006 for a 1,000% gain over 34 years.



NASDAQ Stock Bubble

The NASDAQ rose virtually uninterrupted for 26 years from 55 in 1974 to 4,570 in 2000 for a gain of 8,300%.



30 Year U.S. Treasury Bubble

The price of the U.S. 30 year treasury bond has risen continuously since the mid 1980’s and yields have reached 60 year lows.



U.S. Debt Bubble

We consider last, the greatest bubble in all of recorded financial history which is the bubble in U.S. debt.  U.S. debt has increased by almost 3,000% since the early 1970’s.  The increase in borrowings by the United States has gone absolutely parabolic and is unsustainable.  The duration of the U.S. debt bubble cannot be predicted, but when this bubble bursts, the repercussions will be devastating to the global economy.  Astute readers will notice that the genesis of the housing, NASDAQ and U.S. debt bubbles coincide perfectly with the end of the gold standard.

The bubbles cited above lasted an average of 31 years.  The average percentage gain for housing, the NASDAQ and U.S. debt bubbles is 4,100%.   Extrapolating from past historical bubbles, the gold bull market should last another 20 plus years with a price target of over $12,000.

Americans Remain Tragically Underinvested In Gold And Silver

As predicted many times in this blog, the over indebted and over leveraged world financial system is starting to unravel at warp speed.   Massive amounts of  borrowing by governments during the financial meltdown of 2008 has effectively put many sovereign states at the limits of their borrowing ability.

A rapidly contracting economy and job losses will result in a flood of defaults in the private sector by both businesses and individuals.  A vicious self reinforcing cycle of defaults will cause major banking failures that a bankrupt FDIC will be unable to contain.  Banking holidays will become routine, the jobless rate will triple, the middle class will face financial destruction and social unrest will explode across the country.

Crushing levels of debt will be the trigger that causes an economic depression that will make the 1930’s look like a minor recession.  Eventually, the creative destruction of capitalism (as described by economist Joseph Schumpeter) will extinguish debt burdens through defaults, allow for economic recovery and the creation of new wealth.  The downside to recovery through creative destruction, however, is that existing wealth is mercilessly devalued as paper based asset wealth is destroyed.  At this point, which would you prefer to own – a pile of paper dollars or a stack of American Gold Eagles?

The ultimate restructuring of a fiat based monetary system to one backed by more than promises is inevitable.  The timing of the event is the only open question since governments will use every power, legal or otherwise, to prevent the scenario described above.  Unfortunately, for holders of paper financial assets, the only viable option available for governments at this point are the printing presses.  The ocean of paper currencies that will be printed to “save the system” will debase paper financial assets, reducing their purchasing power to virtually nothing.

Gold, the only enduring currency, has been forecasting a financial crisis for the past decade and especially since 2008.  As economic Armageddon looms, however, most Americans remain tragically under invested in gold and silver.  Conventional financial planners and investment advisers recommend a zero or minor position in precious metals even as gold steadily outperforms stocks, bank savings and other financial assets.


S&P vs Gold - courtesy yahoo finance

Making matters worse, many Americans are selling the little amount of gold and silver that they do own as the conventional press publishes “gold bubble” articles every time gold hits a new high.  As reported in, one major dealer reports that:

As for the general public, they have been selling jewelry by the droves this past week.  On Tuesday, my companies set a record going back more than 30 years for the most number of purchases from the public in a single day.  We broke that record Wednesday and weren’t that far from another all-time record on Thursday.  The main pieces that customers have brought to us have been gold jewelry.  The amount of silver and platinum jewelry has remained steady.

We talk with dozens of coin dealers around Michigan and the country every day.  They are reporting the exact same pattern of activity as we are experiencing.

Perhaps many of these sellers are dumping their gold jewelry due to economic duress, but if they were expecting gold to continue to soar higher, they would not be selling.  The bull market in gold and silver is just beginning and those who hold significant positions will preserve and expand their wealth.

Fed Lays Groundwork For Price Explosion In Gold

Gold hit another all time high of $1,779.10 before pulling back to close at $1745.10, up $26.90.  Gold has advanced strongly over the past year as the Federal Reserve engaged in quantitative easing and extremely loose monetary policy.  Over the past 30 days gold has gained $198 and over the past year, a stunning $548.70 per ounce.

At the conclusion of the Federal Open Market Committee (FOMC) meeting on Tuesday, the Fed announced that it would maintain its zero interest rate policy through the middle of 2013.   The Fed does not normally make commitments that limit future policy flexibility and three of the seven members of the FOMC  voted against the pledge to maintain zero interest rates.

The Fed has held interest rates at zero for 32 months now with little to show for it as debt burdened consumers continue to reduce spending.  With inflation running at 5 to 10% (depending on whose stats you believe), real interest rates are negative and savers are seeing the purchasing power of their dollars destroyed by Fed policies.

The FOMC also said that they expect “a somewhat slower pace of recovery over the coming quarters” and that future action might be taken to “promote stronger economic recovery.”  Since the Fed has already exhausted all normal policy tools, the FOMC seems to be positioning itself for another round of quantitative easing.  Some analysts speculate that the Fed will discuss further easing measures later this month at the Fed’s annual conference in Jackson Hole, Wyoming, where QE2 was launched.

Further fiscal stimulus seems improbable given the restrictions put on future spending by Congress as part of the debt limit agreement.  In a sign of how desperate the financial condition of the United States has become, all eyes are now turned towards the Fed.

Since zero interest rates and two rounds of money printing have done little to turn around the US economy, the expectation is that the Fed will need to do more of what failured before, except on a grander scale.  I expect that as the economy continues to weaken, the Fed will announce a “shock and awe” campaign of massive money printing accompanied by an explicit statement that they are committed to higher inflation.

Federal Reserve policies have been the primary factor pushing the price of gold higher.  The inevitable announcement of further quantitative easing will be trigger that pushes gold prices thousands of dollars higher.

Consider the statement of the former Fed Chairman Alan Greenspan who on a “Meet the Press” interview arrogantly proclaimed that the United States could never default because “The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.”  This is what the United States has come to under the easy money policies of the Federal Reserve and a government that believes prosperity can be created by oceans of debt.  Is it any wonder that the currency is collapsing and the purchasing power of the dollar declining precipitously?

Meanwhile, Kenneth Rogoff (of This Time It’s Different fame) who attended Harvard with Bernanke, tells Bloomberg that the Fed should explicitly set a high inflation target and engage in massive quantitative easing.

Federal Reserve policy makers are likely to embark on a third round of large-scale asset purchases, moving “more decisively” to secure the U.S. recovery, said Harvard University economist Kenneth Rogoff.

“They certainly should do something right away,” said Rogoff, a former International Monetary Fund chief economist who attended graduate school with Fed Chairman Ben S. Bernanke.

“Out-of-the-box policies are called for, especially much more aggressive monetary policy, however unpopular that may be,” said Rogoff, 58, a former Fed economist who like Bernanke earned a Ph.D. from the Massachusetts Institute of Technology. The Fed is “going to move more decisively,” Rogoff said.

Rogoff recommended the Fed say in “very clear statements” that it’s trying to create “moderate inflation.” “In the classic classroom QE, it’s open-ended,” Rogoff said. “You say, ‘I’m trying to create inflation of, let’s say 2 or 3 percent, and I’m going to do whatever it takes.’”

The extreme policy measures recommended by Greenspan and Rogoff prove that the US has already passed the tipping point and has only one policy option left.  If the Fed does not print like crazy, the whole rotten edifice of towering debts will collapse, plunging the country into a deflationary collapse.

Gold will have price corrections as it continues to move upward but the ultimate price will be many thousands of dollars higher than today.  Gold investors should continue to accumulate positions, especially on price weakness and enjoy the unfolding of one of the greatest bull markets in history.