The arguments for gold to rise dramatically are well known and highly publicized. The arguments for gold to remain flat or to decline are minimally discussed and generally attacked vigorously when raised.
We own gold GLD, and we are engaged in credit options transactions relating to GLD to create an income stream associated with owning it. At the moment, we do not have a full allocation of GLD in place.
It would seem to us that inflation and debt repudiation are the two principal ways the developed world can get out from under its debts. That would create a long-term upward path continuation for gold.
However, in the short term, there is a deflation scenario not too hard to imagine given the slowing of world GDP growth. That would create more downward pressure on gold prices, assuming the fear factor did not overwhelm the deflation concern.
In 2008, when deflation was highly anticipated, gold declined about 30%. Today, deflation is being discussed, and gold is languishing.
If a 2008-like concern about deflation should recur, gold could conceivably repeat a 30% decline it saw in 2008. That would put gold at around $1,300. Short of that, something more like $1,500 is a visible chart support level.
We are in a government actions and event driven world more than usual at this time, and anything could happen. Gold could spurt in either direction in the short term.
We expect gold solidly up long-term, but see the reasonable possibility of a significant decline from here if deflation concerns continue to rise among the investing public. The fiscal cliff could certainly cause that to happen.
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