World stock markets seem to indicate the coming collapse of the global economy. Credit is unavailable to individuals, companies and nations. Commodities of all types are plunging. Deflation appears to be inevitable, yet gold prices remain near their all-time highs from earlier this year.
Why does gold trade at $850-$900 when it should trade below $600? Old-school economic thinking.
Gold participated in the overall commodity bubble. There were all sorts of rationale for the surging prices of oil, copper, agricultural products (mostly related to the emerging world's economic elevation), but I think gold just went along for the ride.
As the dollar depreciated so significantly, especially early in the year, demand for gold went up as an inflation hedge. I grew up reading about the long-term "store of value" argument for gold, but I realized years ago that gold isn't what it used to be.
I wasn't surprised when gold stopped going up earlier this year despite the continued decline in the dollar. People around the world began melting their gold in response and selling it for scrap. With so much fear in the market and a historical tendency for gold to serve as a safe haven, I am not that surprised that gold has failed to follow other commodities down (still up in 2008). Stay tuned, though, because in a world where every asset seems to be worth less today than it was yesterday, gold too should crumble soon.
I don't mean to pick on gold, as I could make similar statements about art, stamps, fine wines, antiques or any other "collectible". We already know stocks, non-government bonds, and commercial and residential real estate are under intense pressure.
As one can see in the chart below, commodities have done a complete 180 and have wiped out all of the gains of the past four years in just three months (similar to stocks). I understand that unlike many of these commodities that tend to correlate to levels of economic activity, gold is not as "industrial" as other metals.
Well, gold sure seems to correlate well with the CRB. Maybe it doesn't get to the $400 it saw four years ago, but I will be surprised if it doesn't drop significantly soon. It rose as inflation fears went up, and it has been sustained by investors who apparently don't look forward or who mistakenly assume that it serves the same role in today's world as it always has without examining that notion. If anything should be the ultimate store of value, it seems like perhaps it should be a barrel of oil (though it is harder to store!).
(click to enlarge)
While it is down just 15% from its peak, it has indeed begun to roll over. Gold fans blame the move primarily on the strengthening of the dollar.
Looking forward, I expect to see a lot of sources of selling, whether it is individuals that need cash or central banks. As I review the articles on Seeking Alpha, there seems to be a unanimity in the optimistic views.
The most "bearish" view I found was that silver is a lot cheaper. I question the whole economic notion. If it were just the United States alone and not the entire world wrapped up in this deflationary spiral of deleveraging, I might not question the sustainability of this high price, but this is a global problem.
If gold really still were the safe haven that it has traditionally been, it sure seems like it would be a lot higher (as many have shared in comments on articles contributed to Seeking Alpha). I have learned when something doesn't act the way one expects, one is usually wrong.
Maybe I underestimate the amount of thought that gold bulls have put into their investment thesis, but individuals with whom I have spoken seem to fall into the camp of blind faith. I majored in economics and am quite familiar with the theories surrounding gold, currencies, etc., and I also realize that many of the principles we were taught don't necessarily work in the real world.
If you are investing in gold as a safe haven or inflation protection vehicle, I suggest that you reexamine your reasons. Silver, palladium and platinum are all plunging. Why shouldn't gold?
Disclosure: No current position, but considering shorting an ETF