These are the times that try gold partisans' souls.
Gold took a crack on the head, falling from nearly 1700 (March 27, 2012 basis futures) to nearly 1600 (April 4, 2012).
Is there more downside to come? Maybe.
The purpose of this article is to put it in perspective. We'll strive to be brief; we'll use round numbers, make it simple.
In 2006, gold broke through 600 for the first time and roared on to 710 within days. Just as breathtaking was the fall back to 560, in a relative few weeks. Sounds trifling now, $150, doesn't it, but then it was a 22% decline, and gold bugs howled.
But then, the howling quieted, and from 560, the path was higher. Broken-hearted gold longs could not imagine 1000 looming just ahead. But that's what fate had in store.
In 2008, the yellow metal nearly kissed 1000 (986, 7/15/2008 London fix) for the first time, and then even more amazingly, plummeted to 681 (futures, 10/23/2008) or so in the Great Crush of 2008. Down 31% or so. Lehmann caved. Despair, rampant. Fortunes, lost. German and French moguls killed themselves.
In the midst of all this carnage, except for maybe consummately staunch types like gold bull James Sinclair, who made bold pronouncements about much, much higher prices to come, gold bulls could not have imagined a crossing of 1900 three years hence - not from 681. Yet 1923.70 (9/6/2011, basis futures) lay straight ahead.
Now here we are, 2012. Cracked on the skull with 100 points lower in one month of time within the context of a larger decline from the oxygen-deprived zones north of 1900.
If history repeats, and we have an "average" 2006 or 2008 style correction of 28%, in round numbers we complete the trip down from 1900 at around 1368. Sounds brutal? Yes, but we've had exactly that magnitude of "correction" twice in the last six years.
And here's the other side: if we have an "average" rebound of 2.4x (average of 560 to 1000, and 677 to 1900), we go from 1368 to 3283.
3283 sounds ---- well, unbelievable. Maybe the impossible dream for gold bulls.
So, too, did 1000 and 1900 -- vis-à-vis 560 and 681.
Did market pundits foresee Apple at 600+ when it was nearly bankrupt decades ago? Did they foresee 600 when it crossed 50, 100, 200? Even last fall in the 300s? Now the talk is of 1000.
So, could history repeat?
Could gold - yet again - break the hearts of its adherents, short term, and turn around and levitate to heights all but a few are calling for? Longer term?
There are many potential catalysts, each of which has been dealt with in its own batch of essay(s) around the Internet, but just a quick, "back of the envelope" recounting that support the bull case here:
- Central bank buying
- Rise of the BRICs, alternative reserve currencies to $
- Closing of the SWIFT system to Iran and its counterparties, encouraging use of alternative currencies
- Inflation, U.S. and abroad, from QEs
- QE3, 4, 5, etc.
- War, Iran
- Euro debt crisis, Greece, Spain, Portugal, Italy
- U.S. debt crisis
- The unknowns we don't know
- Combinations of the above.
- All of the above.
The truth is, no one knows.
There are plenty of arguments on the other side, too, for a declining gold price: improving economy, deflation, etc. Gold doesn't make money, it just sits. You know all these.
Then, too, is the argument for "sideways" - a massive immovable object meeting irresistible force.
Macro-wise, a fact not an opinion: the national debt is racing towards $16 trillion as I write this, and entitlements will push it much, much higher in the years to come (only Dr. Ron Paul and his relatively few partisans seems to care, but that's another story). The World Gold Council puts U.S. gold reserves at 8133.50 tonnes, or 261,498,097 troy oz. If U.S. legislators decided to cover it all at once (which is not necessary), but let's say they did, that would put gold at something like $61,185 per oz.
div. by 261,498,097
Ten percent backing puts it at $6100, five percent, $3050. There's that 3 handle again.
Meanwhile, corrections likely are the times that try gold bulls' souls. Having a bit of perspective just might make it more bearable. If you have to go through 1368 to get to 3283, it would be brutal, yes, but ask yourself: would it be worth it?
Disclosure: I am long GLD.