Gold is beginning its move to much lower levels. The recent three plus months' trend of stronger employment figures combined with two strong quarters of overall economic growth and tame (or nonexistent) inflation will lead the market to discount a Federal Reserve move to reduce their accommodative policy by beginning to raise rates this year. All these factors spell trouble for the "barbarous relic."
Of course, economic fundamentals can take a long time to be reflected in the markets. The additional catalyst that will accelerate gold's demise will be the lack of the old buyers. Beyond the seeming tautology is the striking change in the terms of trade for the former major exporting economies that drove gold to the lofty levels of just a few years ago. Without those buyers gold will be unable to sustain these levels. Who are those missing buyers? Central Banks. Gold's unprecedented rise mimicked the rise of oil and many other commodities during the great global economic expansion of the first decade of the 21st century. Amassing huge trade surpluses and mountains of dollar reserves, these central banks worried about these large dollar reserves. The answer? Diversify. The principal asset was gold.
Combine a wary group of export surplus countries wanting to lessen their exposure to the U.S. dollar with an expanding middle class made increasingly affluent in these same countries and gold goes on fire. However, the financial crisis and more importantly the poorly conceived response have structurally changed the global growth dynamic. Today the big exporting nations leading up to the crisis, China, India, and the OPEC nations are but a shadow of themselves. China's domestic growth estimates have been lowered once again and now the country is a net importer of oil when before the crisis China exported oil. The drop in oil prices haven't been good for OPEC, of course, so concerns of diversifying out of dollars as their reserves begin to dwindle don't seem to have the same urgency as before. Besides the dollar is as strong as moose breath so owning mountains of dollars doesn't look so bad.
But the crisis has been over since 2009 and gold, while not a great performer, has not fallen quite like other commodities, especially oil. Why should gold collapse now? The important question is what's different. The answer is the Federal Reserve. With a rise in interest rates seemingly closer at hand, at least in market's mind, this is a game changer. Alternative investments will look increasingly more attractive. Mr. Market's perception of the Federal Reserve tightening is not because of imminent inflation concerns rather it is the perception that the Fed is moving because of the strength of the economy. That means the U.S stock market will continue its merry way, interest rates will begin to offer a return, and inflation, if it shows up, will be nipped in the bud. All factors that spell trouble for gold.
The U.S. economy is finally adjusted to the substantial headwinds of restrictive fiscal and regulatory policies. Growth has come to this post crisis recovery much later than history would have suggested, but given the numbers of late and although uneven, strong GDP growth and employment appears to be sustaining (regardless of what mother nature may have thrown at us in this most horrible of Februaries.)
The result will be gold plunging to $850, and if I underestimate as I did for oil (though still nearly the only one that predicted at least a 30% plunge in oil when it was trading over $100), then a $600 handle is a real possibility. This is an imminent move, beginning this year. So as the old saying goes, when prices go down slowly get out fast. Best make the move sooner than later!
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