June 19, 2024

Bearish Gold Forecasts Suggest Soaring Gold Prices In 2012

Will gold soar this year as central banks go wild with money printing?  Or will gold collapse as debt defaults overwhelm the system and propel the world economy into a deflationary black hole?

Members of this week’s Barron’s Roundtable were asked what they thought about gold.  Panel members offered their usual variety of informed opinions on what could happen to the price of gold during 2012 – here’s what they had to say.

Marc Faber, editor of the Gloom, Boom & Doom Report, expects massive money printing by central banks during 2012 and a continuing correction in gold prices.

The worse the news gets, the more the U.S. and the European Central Bank and China will print money.
In the past 10 years gold and silver have performed superbly. The gold price overshot on the upside when it reached $1,921 an ounce on Sept. 6. Now it is in a correction phase and could fall another $200.
It is not that the gold price will go up. It is that the value of paper money will go down. Diversification is important, and people should put 15% to 25% of their assets in gold.

Brian Rogers, Chief Investment Officer of T. Rowe Price, sees oil as a good investment but does not foresee a big rally in gold prices.

It is easier to get your arms around oil than gold in terms of the numbers and demand.  Oil is a good investment in the next few years, with optionality to the upside if something extreme happens in the Middle East. Gold is a good diversifier, but not a great way to make money.

Fred Hickey, editor of The High-Tech Strategist, predicts higher gold prices this year and views gold stocks as a relative better value than gold bullion.

Gold will rally, then have a seasonal selloff. By the end of the year it could be up 15%, as has been typical in this 11-year secular bull market for gold.
Gold stocks have been terrible. They dropped 20% last year, so that makes them a better buy relative to the price of gold. Last year I owned a lot of gold. Now I have more money in gold stocks than in physical gold or the GLD [ SPDR Gold Trust].
I own a smaller amount of exploration companies through the GDXJ [ Market Vectors Junior Gold Miners exchange-traded fund] and a larger percentage of producers.

Felix Zulauf, President of Zulauf Asset Management, sees gold prices soaring as the world economy approaches depression like conditions, forcing central banks to print money on a vast scale.

The world economy will experience a brutal slowdown. Deflationary forces are going to strengthen and commodities in general will decline. You can buy oil to hedge a decline in base metals. Gold started a cyclical correction within a secular bull market last summer. The first wave of selling is ending now. Gold has to be bought some time this year, probably in the second half, below $1,600. Then the monetary authorities will load their guns again and print more money, which will make investors buy more gold. The gold market is so tiny that when people want to shift just a small piece of their wealth into gold, the price flies to new highs.

Scott Black, President of Delphi Management, favors a modest position in gold stocks but thinks that people holding gold as a hedge against inflation are misguided.

A lot of people own gold as a hedge against inflation. I don’t see inflation in the cards in the U.S. Capacity utilization in the manufacturing sector it is only 77%. We own a couple of gold stocks but buy them as we do other stocks. We look for high returns on equity and low P/Es. We own Barrick Gold [ABX], which trades for 7.8 times this year’s expected earnings. Even absent a big upswing in gold prices, it will do well because production is growing.

Putting things into perspective, the rather lukewarm endorsement for gold by the Barron’s Roundtable should be viewed as a bullish indicator for gold prices.  The healthy and normal correction in the price of gold from the high of $1,900 in August has resulted in rampant bearishness and numerous predictions that the bull market in gold is over.  Ironically, many of the most bearish gold forecasts are coming from the same “analysts” who were predicting the end of the gold bull market multiple times over the past decade.

Bearish sentiment on gold has reached extreme levels according to the Hulbert Gold Newsletter Sentiment Indicator.  The average gold timer has thrown in the towel.  Over leveraged speculative investors panicked at the first sign of weakness in gold and sold out.  According to Hulbert, “this is building a strong foundation for a fresh assault on gold’s recent all-time high above $1,900 an ounce.”

Bearish sentiment on gold stocks has also reached extreme levels as seen by the Gold Miners Bullish Percent Index.


Courtesy: Stockcharts.com

After briefly falling below the 200 day moving average, gold rebounded strongly, rising from $1,598 at the start of the year to a Friday closing price of $1,635.50.  Over the past decade, the few times that gold previously fell through the 200 day moving average  set the groundwork for a major price advance.


Courtesy: stockcharts.com

The fundamental and technical indicators for gold remain rock solid.  Gold may very well wind up shocking the bears by outperforming every other asset class in 2012.

Why Gold And Silver Prices Will Continue To Rise

The September correction in the price of gold and silver resulted in a flood of bearish articles by the mainstream press, proclaiming that the “gold and silver bubbles” had burst.

Since the mainstream press does not comprehend why precious metals have been in a bull market for the past ten years, the proclamation of the “end of the gold and silver bull markets” was, in reality, a contrarian bullish call.

Every long term bull market has sharp sell offs and gold and silver are no exception to this rule.  The sharp rise of gold prices during the summer attracted hot money from speculators and hedge funds who quickly liquidated positions based on short term technical sell signals, driving down the price of gold by over $300 per ounce.

As previously discussed, the fundamental reasons for owning gold and silver have not changed – in fact, they have grown stronger.  The September sell off in precious metal prices was simply another fantastic opportunity for long term investors to increase positions at bargain prices.

Long term investors in precious metals have outperformed virtually every asset class for the past ten years.  Even after the panic selling of September, gold still held gains of over 20% on the year from a price of $1,405 at the start of 2011.  Silver, despite a very volatile year, also remains above its price of $30.67 at the beginning of the year.

Both gold and silver remain in established long term up trends and remain at oversold, bargain level prices.



One strong fundamental factor providing support for further price gains in gold and silver comes from Mark Hulbert, whose Hulbert Financial Digest measures newsletter sentiment on the gold market.  Recent readings of the Hulbert Gold Newsletter Sentiment Index (HGNSI) (tracked by the Hulbert Financial Digest) revealed that at the end of last week gold timers were extremely bearish on gold.

The HGNSI readings dropped to the most bearish level in two and a half years, with gold market timers recommending a 13% short allocation in gold portfolios.  Hulbert’s research shows that gold usually rises when gold timers are very bearish.  Hulbert notes that gold timers have not been this bearish since March of 2009 – a level from which gold prices subsequently doubled.







Why The Gold Bull Market Is Only Getting Started

According to one market seer who has been a long term gold bull, the fear of higher inflation should not be viewed as the primary factor driving gold prices higher.

In an interview with Fortune Magazine, Stephanie Pomboy explains why she likes gold despite the powerful deflationary undertones of the world economy. Ms. Pomboy is the head of MacroMavens, a firm she founded in 2002. Major institutional investors and giant money management firms have become clients of MacroMavens based on Pomboy’s successful ability to forecast major trend moves based on macroeconomic factors.

Ms. Pomboy has correctly been bearish on the U.S. economy since late 2008, predicting a long period of deleveraging due to declining incomes and the deflated housing bubble. Deflated asset bubbles, declining incomes and a slow economy are not the classic ingredients for inflation. Pomboy correctly argued that low inflation, or actual deflation, would not prevent gold prices from surging higher.

Pomboy has a superb track record predicting gold prices. In a December 2008 interview with Barron’s, Pomboy prophetically concluded that “We are going to see a secular rotation from paper assets to hard assets like gold. The whole global competitive currency devaluation, including that of the dollar, plays right into that. We are acting as though there are no consequences to basically running the money off the printing press and handing it to the Federal government to backstop financial markets or bail out homeowners or what not. There is no consequence to doing this, unless or until the rest of the world says to us, ‘We don’t like this game’ and We don’t want to have all the dollar claims we are holding debased by [Fed Chairman Ben Bernanke] running his printing press.”

Those who heeded Pomboy’s advice have seen gains of about 100% as gold moved from the $850 range in 2008 to the current price of $1,675.   As a means of protecting capital against the debasement of all major currencies, gold remains the best hard asset to own.

In a follow up interview with Barron’s in February of this year, Pomboy made another extraordinarily accurate call on both gold and bonds.  Despite referring to treasury bonds as certificates of confiscation, Pomboy recommended buying U.S. government debt and gold, a seemingly contradictory stance.  As Pomboy explained it to Barron’s:

My bullishness on these flimsy pieces of paper is purely opportunistic. It is based on (1) my view that the perception of the economy has run far ahead of the reality and that disappointment will find yields declining. And (2), as I discussed in the interview, my belief that this will find the Fed extending QE–a policy which involves the Fed’s outright purchase of Treasuries… Not only is the Fed now the largest holder of Treasuries, but thanks to Ben’s printing press, it has unlimited capacity to buy. So this is one market where the fundamental laws of supply and demand do not apply.

Finally, for those who can’t fathom going long gold and Treasuries in combination? it’s simple. It’s the neatest expression of a bet on continued Fed monetization which, again, entails the direct PURCHASE of Treasuries!!! The wisdom of this trade has been on full display for ?oh? the last FOUR and A HALF years! The fact that it is still viewed as some kind of oxymoron only reinforces how much farther it has to go.

The Fed’s commitment to further assets purchases was revealed today when the Fed released the minutes of their last meeting.  Although the Fed temporarily stopped outright asset purchases when QEII ended, policy makers are already discussing when to resume the practice.  The Fed has already purchased about $1.6 trillion in government bonds, financed via quantitative easing.  As the economy slows further and government spending continues its upward spiral, anyone who thinks the Fed won’t start monetizing the public debt is delusional.

In her recent interview with Fortune Magazine, Pomboy remains bullish on gold and forecasts higher oil prices as emerging nations reduce dollar reserves.  According to Pomboy, “I’m really interested in strategic resources — commodities that emerging nations like China are trying to stockpile.  Oil would be at the forefront. I think it will continue to be a beneficiary of this global debasement of currency and the need for emerging nations to diversify the foreign exchange resources that they’re sitting on, which are being debased every single day. Why not take that money and spend it on building strategic oil reserves rather than watching it go up in smoke?”

Pomboy’s perfectly logical theory that emerging nations will sell dollar assets to buy oil implies that demand for U.S. treasuries will drop dramatically since emerging nations such as China have been one of the biggest purchasers of U.S. debt.   The absence of sufficient bids at Treasury auctions will immediately cause the following two events to occur:  1) the Fed will be forced to monetize ever greater amounts of debt in order to keep U.S. interest rates from rising and 2)  the price of gold will soar.


Looking for a Top in Gold

Investors and analysts alike are looking at the record prices of gold last year and trying to predict the future. Last year the price of gold rose by more than 27%, contributing to an increase of more than 400% over the past decade.

Another year of double digit gains in the gold price has many experts considering whether prices will continue their upward trajectory, or whether there are warning signs for a potential top. The predictions are as varied as their sources:

  1. According to Goldman Sachs, gold will top in 2012 at $1,750 an ounce.
  2. John Nadler at Kitco.com predicts that gold will cap by the end of 2011.
  3. The CEO of U.S. Gold, Rob McEwen believes that the market is “a third of the way” to a mania.
  4. Jim Rodgers estimates that the long bull market in gold will result in a huge bubble for the commodities market as a whole—and he thinks we’re halfway there already.
  5. Scott Redler at T3Live.com predicts that if the price gap is truly filled, gold will stay range bound between $1,320 and $1,400 for a time before mustering up a bigger rally.

Everyone is eying the market and trying to decide what it is going to do next so that they can react accordingly. Surprisingly though, most investors do not own their own gold and have never owned it.

According to The Street, you’re much more likely to see people selling gold than buying it. Still, the media excitement about gold prices, not to mention the prices themselves, is generating new investors. The SPDR Gold Shares added 155 tons this year, for example. Longtime investors are waiting for the day when everyone jumps on the bandwagon, resulting in the gold bubble they’re currently trying to predict.