Gold Prices Can Fall, Regardless of Fundamentals

I found this article at Seeking Alpha from someone I am not familiar with who spelled out the fundamental (read bullish) case for gold.

For anyone new, I have had exposure to gold one way or another since before my site started and will keep gold (I expect) for the foreseeable future.

I am neither bullish or bearish. I view gold as an important diversifier for external shocks to the stock market and the fact that the trend has been up for so long has obviously helped returns.

In the article the author states "In order for gold to drop, here are some of the things that need to happen:" and then spells out 16 reasons that he feels supports his assertion. The point of my post is not to debate the fundies of what gold should do. Even if he is exactly right on all counts gold could still go down. Things go in the opposite direction from what they should all the time.

Gold as measured by client holding (GLD) hit a high of $100.44 on March 17. It then hit a low of $83.96 on May 2, so a 16% drop in six weeks. I doubt that the fundamentals were any different on March 17 than when the author first wrote his article. Further I doubt buying at the high would lessen the potential zig from gold versus equity market zag if there had been a meaningful external shock. The point is not to disagree with the author about anything but simply to add a reminder that no matter what the story behind something the price can easily go down.

Comments

[Hugh:]

And easily go up. You forgot that part.

2008 May 19 03:26 PM

[User 195787:]

Scratching my head here. The above is a little confusing (saying gold could still drop even if all the events for a drop were to occur). But.. today (and, actually, for the past few days) gold has been rising without rising oil prices or a falling dollar. Creeping realization that stagflation will be the reality for some time?

2008 May 19 03:37 PM

[Brian Pursley:]

I like the fact that you are neither bullish nor bearish. To me that means you probably know what you're talking about...=)

"I think the people who are making forecasts... don't know what they're talking about. Because we really don't know." -- Peter Bernstein

2008 May 19 03:44 PM

[Yellowstone:]

I read the same article and agree with it, especially the last point:

16) Finally, AND THIS IS KEY: ‘Real interest rates’ (T-bills less CPI) need to be positive by at least +2%. (They are currently negative by that much).

But I also agree that gold prices can deviate from the fundamentals in the short term ( months, weeks, days ).

Deviation from the fundamentals in the longer term runs into a lot more resistance, and when the resistance is overcome gold's price ( over the last nine years ) tends to quickly levitate to a whole new higher level.

It's a great bull market, resist it if you wish. I will go with it's flow until the real issue's of inflation are addressed. At present some are not even acknowledging inflation as a problem, while others ( Bureau of Labour Statistics and the FED ) actively try and disguise it's presence. What folly.

2008 May 19 04:24 PM

[GMiki1:]

Why didn't you just comment on the other, quite well-written piece instead of writing your comment as if it were an independent piece, which it's not? You have nothing substantive to say. You have your opinion but you don't give any reasons for them. In fact, I suspect you don't follow or understand that gold market at all. :)

In fact, you don't know the difference between gold going down and consolidation in the market.

2008 May 19 04:48 PM

[Roger Nusbaum:]

user 195787, I took the 16 points as sort of being sarcastic because the odds of them happening are low (I agree with quite a few of his points).

I would repeat from the post that I own gold across the board for clients.

Gmiki, I wrote the post for my blog which SA syndicates. "...as if it were an independent piece" I linked to it right away and described teh gist of it so I don't follow. I would point out that you don't know what the article is about. You said I gave no reasons for my opinion, um I didn't actually give an opinion on anything. I conceded his points because that was not the focus. The focus quite simply, and I said as much, is that not matter what the story is the price can go down. Correct me if I am wrong but from $100 to $84 that was down? Wasn't it?

2008 May 19 06:00 PM

[jt:]

Hmmmm...let's see if I get this wisdom. So then...innocent people can go to jail...bad things happen to good people...criminals can get elected or otherwise hold positions of high authority...our laws don't necessarily follow or obey the Constitution...laws aren't necessarily made by our legislature...the will of people isn't necessarily done...our markets are not necessarily free and open...the information put out by the mainstream media isn't necessarily true...the govt doesn't necessarily give a crap about its people...

So...to summarize: shit happens?...am I getting this right? jt

2008 May 20 09:07 AM

[bill sanders:]

Nussbaum did exactly what he set out to do: add needed perspective to the irrational exuberance of a type of true believer.

As one of those with a tendency toward true belief (we're called gold bugs, no?), I appreciate his efforts.

2008 May 20 09:07 AM

[adamn111:]

much ado about nothing

2008 May 20 10:23 AM

[User 30121:]

I am confused about your article, Russ. What I am NOT confused about is that after reading it, I deduced I WASTED my time reading it....

2008 May 20 02:00 PM

[fran:]

i read the original piece on 16 items. i read your piece. i fail to grasp the criticisms. do some expect every news article to be fundamentally novel/enlightening unto itself. some readers may wish to read both--taking your outlook on gold and persue the other16. it took but a moment to scan you piece and accept/reject/seek more.

2008 May 20 03:34 PM

[User 166212:]

The only thing notworthy in this article is paragraph three. Toss out eveything else.

2008 May 21 02:56 AM