Gold Price Plunges: Might as Well Hold Stocks

Aug. 6.08 | About: SPDR Gold (GLD)

I knew it was time for some action when I received an e-mail promotion entitled "Fannie Mae/Freddie Mac bailout to ignite huge wave of inflation sending gold to $2,200" last week. Its author argues:

The government is already 6 trillion dollars in debt, and doesn't have this money. So they either have to borrow or print a colossal amount of new paper money. And that's going to ignite a new wave of inflation that will make the late 1970s and early '80s -- when inflation reached 14% a year -- look like a Sunday school picnic. Gold almost tripled back then and I expect it to at least double with the coming wave of inflation.

With another Jimmy Carter in the wings for the White House, who am I to argue against the "history repeating itself" line of argument?

So far, however, gold is behaving just like the speculative commodity it is. Just like oil -- whose realistic and immediate upside is $150, $200, $500, depending on who you ask and which plummeted $30 in the last two weeks -- gold is hitting the skids right now. Yesterday, gold for December delivery fell to $895.50, down $12.40. Prices hit lows of $889.10 in electronic trading.

Part of the reason for this temporary decline is that gold's hedge value against the dollar fell as the greenback ignored dire predictions for the demise of the U.S. economy and actually increased to a six-week high against the euro and pound sterling.

On August 1, Howard Ruff wrote on

Gold and silver seemed to have stalled out, raising questions as to whether or not the bull market is still intact. It still is! I remember during the bull market of the '70s when gold and silver stalled out for as much as two years with a decline of up to 30% on the way to their eventual highs of $50 silver and $850 gold. Then as now we heard a chorus of voices claiming the bull market was over, so liquidate! The fundamentals of money-supply growth were still in place, so I begged you to hang on, and we were eventually handsomely rewarded.

Today is the same, only more so. With government unfunded liabilities (for Social Security, Medicare and Medicaid) more than $50-trillion, and no end in sight, and government doing its ostrich act (head in the sand) hoping the pain will just go away, and their standard practice of just throwing money at every intractable problem, we have set the stage for continuing soaring inflation. (...)

So hang in there and be patient. Someday you will brag about buying silver below $20 and gold under $100.

I know "gold under $100" is just a typo. At least I hope it's not a Freudian slip. But if, as Mr. Ruff implies, fluctuations of 30% and more are supposed to be accepted as standard deviation for gold, this supposed Führerbunker against inflation -- I have to tell you that I take U.S. banking stocks any day.

Oil's downside by now has been pegged at $110 and even $70 per barrel, that's 26% or even 50% below its record high. For gold, a synchronous decline would result in prices around $750 or even $500 per ounce. It seems unlikely. But, since my gold bug friends brought up the Carter Administration... history not only documents straight increases -- but horrendous drops far larger than that, all within the last three decades.

Stock position: None.