Gold just finished its worst week in more than 4 years, with hibernating gold bears out in full force. The media was full of talking heads talking down gold. What I like about gold is that its value is based upon the greater fool theory, so there are almost infinite ways to value it. There is no way to run a dividend discount model on gold because gold doesn't pay a dividend, gold doesn't have earnings, gold doesn't have a growth rate, it simply has a price and a price history. Because gold isn't a company with cash flows, technical analysis dominates its analysis. Basically if gold is going higher buy, if it is going lower sell. Others try to establish a supply and demand model, trying to forecast the future demand in China and India, and the cost of production for the miners. Just modeling one of those factors is a Herculean task, let alone combining all three into a single price model for gold.
Because of this difficulty in modeling gold, I like to watch the videos and read the analysis to understand how others value gold, and observe how the valuation methods seem to change, much like the new metrics of the internet bubble. In the above video the take home new metric is that paper gold, the SPDR Gold Trust (NYSEARCA:GLD) is dominating the gold trade, and that anyone that was going to own gold already owns it, and that trade has played out. The interesting take I get from this is that holders of GLD don't care what the cost of production is, so if gold continues to go down, many will panic sell or have margin calls that force them to sell, so the supply and demand model will essentially be useless. China and India will have plenty of cheap gold to buy if GLD liquidations continue.
In this video legendary commodity trader Jim Rogers delivers some of the best common sense analysis I've seen for gold:
1) Gold has been up 12 years in a row. It was long overdue for a correction.
2) Good news is no longer even driving gold higher. When something is good news for something and it goes down, you should be very very worried.
That second pearl of wisdom is priceless. If good news doesn't drive gold higher, what will?
In this video Don Hayes defines gold as a "fear index" much like I did in an article I wrote back in March. As optimism returns to the markets, pessimism will visit the gold market. He also focused on the US Dollar, as did the first video reviewed above. A stronger dollar will likely keep gold getting weaker. Basically a bet on gold is a bet against our Federal Reserve, and one of the best known axioms on Wall Street is "don't fight the Fed."
In this video Fortress Investment founder Michael Novogratz points out a similar theme. If QE and all the other things favorable to gold aren't driving it higher, what will? It is unlikely that we will see another 2008 anytime soon, so what will be gold's second act? It is hard to create a scenario worst than 2008 anytime in the near future. More on Michael's analysis can be found in this article. Later in another interview Michael claimed that gold was the classic bubble and that he wouldn't be surprised to see gold reach $500/oz. He stated that when bubbles burst they go all the way down.
Soros and other major gold holders have also been selling. The video highlights how there is some buying, but the price trend is still down, and catching a falling knife often ends up badly.
In conclusion, in my opinion we are on the backside of the gold bubble, and while gold may have its bear market rallies, they are likely to be nothing more than dead cat bounces or technical retracements. While it is only a small sample of opinions, all the above linked videos identified price targets below where gold is trading today. Two years ago you would have been hard pressed to find 3 interviews bearish on gold in a month. The linked videos above were recorded over a few day period, and I was unable to find any bullish videos for gold except this one by Peter Schiff, who has almost all his credibility tied to a gold rally. Personally I think his analysis represents the worst out there and is founded upon a complete and utter misunderstanding of our monetary system. If I was going to develop a buy signal for gold, it would be when Peter Schiff turns bearish on gold. He and people that follow his analysis are likely to be the last to throw in the towel on gold. When that happens, I will turn bullish on gold.
Disclaimer: This article is not an investment recommendation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.