I get more emails, letters and phone calls about gold than anything else. An almost religious fervor seems to go along with being a gold bug. My bearish view on gold usually comes as a shock to worshipers. Yet year after year the precious yellow metal refuses to reach for the stars like it is supposed to. Why is this?
The most common belief by gold bugs seems to be that everyone will flock to gold as the ultimate hedge against inflation, international crisis, currency collapse and all other things apocalyptic. The latest global credit crunch may well be the trigger that finally brings about the demise of the US dollar, and when everyone finally loses faith in paper money, stocks, bonds, real estate, governments and central banks, gold will be the one last haven of security. Better to buy it now before the price explodes and we are talking about gold in terms of thousands of dollars an ounce instead of hundreds. The Fed will try and print their way out of trouble, which will cause hyperinflation, and Uncle Sam will be happy because his skyrocketing debt will cost less to service. The only asset of real value will be gold, which is finite. Panic driven demand will push the price beyond anything we have even thought of.
Sounds familiar? Only problem is I think it’s dead wrong. If you want to pay the current price of around $660 an ounce, by all means do so. But I believe you will be paying three or four times too much for it.
Don’t get me wrong. I am a gold bug at heart. Yes, I can see the day when gold will be thousands of dollars an ounce. But not before it falls to less than $200 an ounce.
In my book and newsletters I have used charts to explain the main reason for my bearishness on gold in the short to medium term. Every five wave move is corrected in three. Waves follow form, not the clock. Gold has been in a bear market for 27 years since its $875 high in January 1980 and it is far from over. The $740 high in May 2006 was only wave B. Not until wave C is complete can gold enter a new bull market.
Now what about the likely economic backdrop to the technical picture I have painted? Well, the title of my book is “How to Profit from the Coming Great Depression.” So that probably indicates where I see the economy in the future.
Every depression in history has been accompanied by DEFLATION, not INFLATION!
The technicals and the fundamentals match. Gold does not like deflation. In a deflationary period, cash is king. So what if the US dollar falls against the euro or the pound or the yen? Why will that concern you if you earn your income and spend it in US dollars? You will only be directly affected if you are transacting in those other currencies. Yes, eventually import prices might rise. But for quite a time that will be more than offset against discounts everywhere as shopkeepers try desperately to keep the doors open. With each price drop your dollar buys more. Why would you want your money in gold, which pays no interest and is falling in value?
Don’t worry, when I think the time is right to buy gold I will be screaming my lungs out (well, maybe my keyboard). But that time is not now. Even in the near future I can see gold falling below $500 an ounce. And yes, this should coincide with a rally in the US dollar.
And don’t forget: In 2001 I was screaming out my recommendation to buy gold when every man and his dog had cast it to the scrap heap. The gold price rose from not much above $250 an ounce to almost $750. I am not always bearish on gold. It’s just that, like any other asset, there is a time to buy it and there is a time to sell it. Now is not the time to buy it, in my opinion.