Albert Edwards is known for making bearish equity calls and bullish gold calls. And more often than not he provides fairly strong arguments for his forecasts. Traditionally I am an equities bull, so as you can imagine, I wholeheartedly disagree with his forecasts. In one of his most recent updates, which can be found on ZeroHedge, he states that the S&P 500 will drop to 450 and gold (NYSEARCA:GLD) will shoot to the moon to $10,000.
I 100% agree with him that rapid inflation will, for the lack of a better word, doom the United States. Of course this presumes any new monetary policies in the future will not attempt to ease inflation without taking too much money out of the system; which would cause an acute economic collapse. But, these problems will be addressed later when it's too late, as is the norm.
Gold, Gold, and More Gold
Edwards provides the typical pro-gold argument; which is, something along the lines that currency debasement/devaluation will make gold a strong long term investment. And with most of the world using very easy monetary policies, this seems like a sure bet. Of course, with the US planning to tighten their monetary policy in 4Q13 or 1Q14, then we will likely see continued volatility in the price of gold. Nevertheless, Edwards makes a very important point - for reasons he did not even realize - about gold declining 47% from 1974-1976 before becoming an 8 bagger by 1980. The two notes that should be made from this are that:
1) It indicates a key technical aspect of any financial market, which is: after a tremendous pullback, the underlying derivative/s will shoot to the moon, unless, of course, the underlying derivative is fundamentally flawed.
and 2) The increase in the price of gold may be attributed to the fact that throughout the late 1970s mutual funds became a widely popular investment tool and with a massive influx of funds then, perhaps, the price of gold was exacerbated as demand for "gold" overwhelmed anything that was seen since the California gold rush. Keep in mind it took gold over two decades to eventually eclipse the value reached in 1980. Therefore, perhaps, this acute demand was the reason for gold's substantial increase in value which subsequently caused a bubble that burst and took over two decades to recover. Sound familiar to housing in the 2000s? It should.
So the question that remains is simple: recently, gold's value has been pushed higher thanks to loose monetary policies, and, as these policies end, will the price of gold continue to climb in the short term even after a moderate correction? I don't know the answer, and nobody will know until after the fact. If, however, we need a near 50% correction to set gold off to the races, there is still plenty of downside to come. Is it possible that gold could drop to $800-$900 if the US officially announces a slight reduction in asset purchasing? Of course.
S&P 500 To 450
Next we are on to the "S&P 500 to 450" thesis. If Edwards had stated that decumulation would be the reason the S&P 500 will collapse then I would at least give him a few kudos. Unfortunately he did not. In fact, it is almost an oxymoron to have an equities market collapse along with a forecast that yields on 10yr Treasuries will move lower; unless we undergo some sort of complete economic and political collapse. Remember, if Treasuries are not worth your money (which they are not right now) then move into equities. If you have a lower risk tolerance then find some strong Preferred stocks, corporate or municipal bonds, or dividend giants with extremely sound fundamentals.
As I digress, the S&P 500 will likely correct in the near future. A slight correction of ~10% +/-2% should be in order after the rally we have seen. But S&P 500 to 450 is so far off base it reminds me of the "Apple to $1000" forecasts. Or "gold to $10,000" for that matter. Maybe gold will hit $10,000 in a few decades courtesy of rapid inflation pushing the price of everything sky high.
The Fundamentals Are Shifting
At the end of the day, I am historically a gold bear. However, after the recent pullback I recommended to a few more risky clients that they should buy at the bottom while keeping in mind the highly volatile environment means you should set some safe stops and take smaller profits than they would like. I still like gold after any major pullback. But as a long term investment there are plenty of better options. Edwards likes to "bet against central banks competency and given their [central banks] track record that's certainly a bet I'd be happy to still take." I do not, will not, and will never recommend taking that bet against central banks.
The most important note to make from this is that the fundamental reason to hold gold is shifting. Once the fundamentals disappear from any investment you have to reconsider your position. Remember, the fundamental reason for holding gold was QE and currency debasement. QE will be coming to end sooner than most people would like to admit and thus gold's volatility will skyrocket.
Additional disclosure: I recommended to certain clients that they should buy GLD at 135-140 while preparing to sell at 145-150.