An article published on Reuters warns gold investors and in particular jewelry buyers that nothing goes up forever, so beware of a crash. And what can cause this crash? A stronger dollar, strengthening U.S. economy or rising interest rates.
These are legitimate fundamental reasons for gold prices to fall (or crash), but the second question -- and perhaps the more important one -- is when the crash will happen? Within a week? A month? A year? Or sometime in the coming decade?
Gold is troublesome in my book because it really isn’t an investment. It’s a reserve currency of sorts that’s heavily traded by institutional investors. It doesn’t pay any dividends or interest and is bought in times of widespread fear.
Still stuck on the need to own gold? What about the imminent collapse of the American and European economies?
Before you pawn your wedding ring, keep in mind that in real times of crisis the metal won’t replace food or water. As Voltaire reminded us in Candide, it would be better to tend to our gardens.
A stronger dollar is not good for the stock market and US economy. In today’s global markets, governments are after devalued currencies to inflate their debts away. In regards to a strengthening US economy, while the asset market is rising, the recovery is very fragile as the labor market and housing have not improved. Many are expecting a major correction in stock market.
Rising interest rates are bearish for gold but only when the real rates are positive, i.e. when the nominal interest rates are above the inflation rates and there is incentive for investors to move money from safe haven to more risky assets for higher gains.
While we agree with the article that the prices will not go up forever, based on the current fundamentals, the short- and mid-term outlook for gold prices are bullish; in our opinion, this decade-long secular bull gold market has room to grow.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Long select gold stocks