Now Everyone Knew The Gold Plunge Was Coming

Includes: GLD
by: Robert Wagner

What I love about the financial media is that once something occurs, they act as if everyone saw it coming. In this video Henry Blodget mockingly discusses how obvious the collapse of gold was, and that everyone should have seen it. Of course the only people that didn't see it were those anti-Government cable watching Tea Party members that religiously follow the preachings of Glenn Beck, Ron Paul and the Austrian School of Economics. Unfortunately there is some truth to it, and the Tea Party's association with gold and nonsensical movements like "End the Fed" are likely to destroy their credibility, as well as make a lot of their members lose a whole lot of money.

Once the media smells blood however it is like liquid courage and people line up to kick a trend when it is down. In this video a market technician identifies 4 reasons why gold will fall below $1,000.

1) Gold just broke the 200 week moving average

2) The previous resistance level of $1,000 will become support

3) Markets like physiological round number levels like $1,000 to find support

4) $1,000 would represent approximately a 50% retracement

The most interesting part of the video however was the discussion of production costs of gold. Currently it is believed that the average production cost of an ounce of gold is $1,200. That however is a suspicious number given that gold was being produced when gold sold for 1/4th of what it sells for today. It is unlikely that production costs have increased so dramatically over the last decade. Personally I wouldn't put much faith in using production costs as a way to analyze gold. Gold mining is extremely capital intensive, so the majority of their costs are fixed. Those kinds of industries are notorious for price wars and selling their products below costs, sometimes for extended periods of time. The post deregulation airlines are a recent example of the suicidal price wars that can occur, and how production costs are relevantly irrelevant when depreciation and debt payments are your major costs.

Personally I think the argument against gold is much more simple. A bet on gold is a bet against the Fed. Gold needs at least the expectation of inflation to support it, and with the Fed shifting from QEfinity to unwinding, inflation's best chance has passed. If inflation didn't develop during QEfinity, it isn't likely to develop when the Fed stops printing money.

In conclusion, hating gold is becoming mainstream, and that can't be good for gold. Gold buyers have been hanging their hats on the Fed generating inflation, but that is becoming ever more unlikely. Without the hope of inflation, there simply isn't much to hold up the price of gold. Worst yet, "paper gold," hedge funds and other unemotional holders of gold may become forced sellers, likely to drive the price of gold down even further, as they exit their positions to catch the next hot investment. It is unlikely they will return to gold for a long time, and without them a much higher price for gold is hard to imagine. Gold's glory days are simply passed, and are unlikely to return anytime soon.

Disclaimer: This article is not an investment recommendation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.

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.