The price of gold right now is far above the historical inflation-adjusted price throughout the 20th Century. The reason is simple: gold prices are based on fear, not any sort of built-in income or asset growth potential. And people have been fearful -- incredibly fearful.
But what happens if the fear is suddenly cut?
Then a huge catalyst for the prices will take a big tumble. In this article, we're going to talk about gold prices in the near-term and the long-term.
For the Cliff notes version, I think there's a good chance we're going to see gold prices stay sideways or correct -- and not reach current levels for some time. This all could change with some very possible events -- a new recession, QE3, and other events.
When it comes to a correction, I honestly hope this happens because I'll be buying up as much gold as possible over the coming years.
What About QE3?
If QE3 happens, and there's a good chance it will, then gold will likely get a new breath of wind at least for a while.
But the Fed won't likely do QE4 or QE5 -- not anytime soon. Inflation is beginning to pick up and central bank managers around the world -- in the US and even in Japan -- are warning that keeping rates and QE too long will do far more harm than good. This was true the entire time, but now it's becoming so obvious that even the Fed is beginning to know and face the fact that they're running out of bullets.
For the context of this article, I'll be talking specifically about after QE3 will end -- if it ever occurs.
In the immediate term, gold is likely still a good asset and making a speculation in expectation of low interest rates for another year or even QE 3 isn't a bad call at all. Goldman just announced that they're suddenly bullish on gold right now as well.
I Must Hate Gold, Right?
Don't get me wrong -- I'm not some sort of perma-bear when it comes to gold. For years, I've been talking about gold, why I loved gold, and why everyone should have gold in their portfolio. I own and will continue to own and buy gold.
I've also made it clear that I think the age of the dollar is about to end.
But we have to be completely honest about something, and that something is that no bull market lasts forever -- especially not gold. There will be huge decades, bad decades, and sideways decades. The 90s were mostly sideways -- mostly because people were enjoying the good life of the middle of a 25-year-super bubble, as Soros described it.
But right now, the numbers and the environment are starting to change.
Gold Is Expensive Right Now
In late August of 2011, when gold prices were peaking, I wrote an article for the Mises Institute of Canada saying I thought gold was going to likely correct. In the article, you can read:
"But just because I like an investment doesn't mean that it's always going to perform well. Gold, even after inflation adjusting the prices, is nearly 2-3x its historical price of roughly $750. This means gold is expensive compared to its historical price. Does this mean there's no more room to grow? Of course not."
And gold did correct, almost immediately. What goes straight up (on an inflation-adjusted chart) must come down, and gold is no exception. It's not magical -- it simply responds to runaway-inflation fears of investors. That's the beauty of gold -- it's not something that will predictably make you get rich quick, but is supposed to retain its value, or close to it, over decades and centuries. That means it's incredibly low-yield -- and that's fine.
Either way, it's unavoidable that gold -- inflation adjusted -- is fairly expensive based on past prices. The price fluctuates quite a bit, and right now we're seeing the upper fluctuations.
Some people, of course, think gold is cheap, and pull a number out of the air like $5,000 or $10,000. That just shows us one of the basic issues of the gold market -- the price is based on speculation and not at all asset-growth or income. It's hard to price gold because it involves mostly psychology and predicting how other people are going to behave -- see below.
Gold is a Fear-Driven Asset
As I've written at my own site in the past, gold is a fear-based asset. It's based on fears or predictions of inflation -- and when those fears and/or predictions begin to get scaled down and people are lulled off to sleep, a short-or-medium term correction or flatlined market are likely.
This is unavoidable. This isn't based on whether you believe the recovery is real or not -- this is just based on how the gold market works.
After all, remember what happened the last major gold bull market. People were predicting gold would hit a billion-trillion dollars an ounce, only to see the Fed increase interest rates and people begin to move out of gold -- Soros' theory of reflexivity was apparently true, and the market overreacted the other way. It took decades to recover.
Fear is Starting to Fade
Fear is starting to fade. Lance Roberts handled this topic well Wednesday. The economic data of the last few months has been fairly positive, putting many people in the position that they're less worried about runaway inflation and many are looking forward to more positive news in the future.
This could change, of course. A new recession could push the Fed to go crazy printing out more money, shooting out more than just QE3. We could go right back to square one -- and gold prices would follow suit. When that happens is anyone's guess. As Doug Casey is famous for saying, "Just because something is inevitable does not mean it is imminent." And that's where the art of investing lies.
But until then, the fears are dying. There are other factors that gold make gold drop, but this fear is the critical foundation.
What's Going to Happen?
You know that famous Buffett quote? Be fearful when others are greedy and be greedy when others are fearful? If gold prices begin to seriously correct, this would be a time to take that literally.
When the market isn't fearful is one of the best times to pile into gold, as the Permanent Portfolio Fund has shown us -- buying gold while it was so cheap allowed their fund to grow insane amounts during the years stocks stayed flat, meaning they could then trade the now expensive gold for the now cheap stocks. That's a winning combination.
If you agree with me and think that our government is just replacing bubble with bubble, and think that we're eventually going to have to pay the piper, then you should be hungry for a gold-price correction. I know I am. When -- or if, I should say -- gold prices stay flat and correct, I'll keep buying like I have been.
I realize this is a position at odds with the people who hate gold and the people who worship gold, but it makes sense.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Disclosure: I have exposure to both gold and silver, and will likely be adding to my exposure regularly.