It is possible that gold may get interesting in the next week or two. Just a hunch. Look at the chart (click to enlarge) for the last year or so. Three miserable fails at the $1,000 mark. 
In July of 08 and again in February of 09 were the first two efforts at $1,000. Those were tough months. In 08 half of Wall Street was going out of business. In March of 09 Citi (C) was looking like a goner and so was the global economy. Of course none of that stuff came true.
I was scared during both of those periods. You would have been nuts not to have been. The fear was about deflation. 30’s style. Gold was breaking to record highs while every other asset class was collapsing. The rapid decline in demand created a big pool of workers and the economy quickly fell well below capacity. There was no inflation forecast in the gold price. It was all fear of deflation.
I did not understand that move in gold back then. It was counter intuitive. It was just one of the many market dislocations that occurred during the period.
The more recent high on June 1, was based on some more traditional assumptions about gold and its relationship to other currencies. In a very short period of time there appeared to be a sharp turn in global economic activity. China was buying everything were the reports. The dollar was returning to weak pre-crisis levels as the fear trades unwound. Most importantly there was a growing perception that just maybe we had printed too much money and that things were about to get out of hand in the direction of inflation.
Funny how quickly perceptions change in the market.
No sooner did that notion take hold, it was lost. Some reality set in and rained on the party. Gold and many other stocks/commodities that had been benefiting from the ‘Growth Trade” just faded. The talk on TV has been that gold is a three time loser and is dead. The yellow metal is faced with a 60 year low in inflation and we are not going to have an economic collapse. Where is the upside in gold in that story? I think a lot of weak longs left the gold market in the past few days. The market is not set up for a new source of demand.
Possibly gold will catch a bid the old fashioned way. Some global political chaos could do the trick. Certainly the pieces are in place for something like that to happen. The Iran story is impossible to predict. Some possible outcomes:
- In the next few days a new coalition government is formed. Stability is re-established. Reason and the rule of law prevail. Peace spreads throughout the Middle East.
- The opposition continues to grow. There is violence in the major cities. The military forces refuse to fire on the citizens. Chaos and a vacuum of power will be the result. The likelihood of a soft landing in this scenario is remote.
- All media is censored. There are house arrests for all politically active individuals. Those that participate in street protests are beaten and arrested. With no press to watch, the protests stop. A repeat of 1979. In this scenario the talk will quickly turn to, “When is Israel going to launch an air attack”?
Anything is possible. Of the foregoing the first is the least likely outcome. My guess is on some variation of the third. Either the second or the third will be reflected in the gold price. We have not had global politics impact gold prices for some time. We might be due.
