Paranoid Little Fish And The Collapse In Gold Prices

Includes: GLD, IAU, PHYS, SGOL
by: Robert Loftus

During the Great Recession, gold prices received a significant amount of support from small retail investors who eagerly purchased anything they could find that had some amount of gold in it. Yellow journalism outfits such as Newsmax and The Daily Caller have run endless series of infotainment pieces with headlines to the effect of "Economic collapse imminent! Buy gold now!" As the economy improves, QE is tapered, and the safe haven status of gold is diminished, many of those small investors are likely to panic, and a rapid sell-off in both physical gold, and gold ETF shares appears imminent. Also, the right-wing media outlets that are still pushing gold on small retail investors are caught in a Catch-22, as the more extreme and outlandish their pro-gold propaganda becomes, the greater the reaction is likely to be when people realize they lost a great deal of money by buying gold. Given its current trajectory, one should not be surprised to see gold well below $1000 per ounce before the end of 2013.

The U.S. economy has clearly improved significantly over the course of the last few years. The unemployment rate has fallen significantly in the last few years, and the JOLTS survey shows significant YOY improvements in both number of openings, and number of hires for March and April of 2012 to 2013. The Case-Schiller index shows that home prices have started to rise again, and new car sales continue to show year over year improvement. The apparent response to this information from gold bugs -most of whom are of the extreme right wing Libertarian/Austrian or Tea party variety- is to claim that we're really in an economic Depression, that all public and private sector economic reports are just "Soros/Obamist propaganda", and that everyone should keep buying gold.

There is a general consensus that some tapering of the Federal Reserve's QE strategy is imminent. Another article I've written, 'Why the Fed Should Pull Back on MBS Purchases', offers arguments as to why a pull-back on the Fed's monthly purchases of Mortgage-Backed Securities seems logical and imminent. A pullback in Quantitative Easing will result in a rise in the U.S. dollar Index and a significant decrease in gold spot and gold ETF share prices.

I hesitate to call anyone who bought gold because Glenn Beck told them to an "investor", and it's hard to know how long it will take this group of gold buyers to realize that their "investments" have lost money, or exactly how they'll react. The only thing we know for certain is that when people lose a large sum of money because of bad investment advice, they are likely to become skeptical of what they're told by the person who gave them that bad advice. That means that when Rush Limbaugh is assuring his listeners that it's President Obama's fault that all the Cash-4-gold places are going out of business, those listeners are likely to panic, and the market will be flooded with gold jewelry and coins from low-information investors who believed the stories about gold going to $4000 an ounce.

Gold prices will be falling dramatically in the next year. The U.S. economy is improving, and that has diminished the appeal of gold as a safe-haven investment. A tapering of the Federal Reserves Quantitative Easing policy appears imminent, and that will put immediate downward pressure on all commodities valuations - including gold. The gold market is also likely to be flooded with gold coins and jewelry from low-information investors who will panic, and try to cut their losses by selling their gold as quickly as possible. There is a very real possibility that this combination of factors could push gold to below $1000 per ounce before the end of 2013.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.