Gold Bears Facing Moment Of Truth

Includes: GDX, GDXJ, GLD
by: Simit Patel

Gold bears, those who argue that there has been a bubble in gold and the top has been reached, and that new highs to $2,000 and beyond are not in the cards, are on the runway to their moment of truth: the moment where gold bears/top callers are either vindicated or proven wrong.

We have had a parabolic run up past $1,900 and a consolidation around $1650, which is where we now are. As for how long this consolidation phase will last, I prefer not to speculate with much conviction; my hunch is that it could be days or months of time fluctuating between 1575 and 1775.

But after consolidation comes the moment of truth: the point at which the market chooses to make the next leg up, on its way to re-testing the previous highs past $1900, or on its way down, taking unemployment much higher with it.

Of course I think gold's purchasing power is going to go much higher, and think the Western banking system is on its way to a hyperinflationary crash -- it is only a matter of what comes next. But specifically, nothing has really changed; the world is still insolvent, and we are still in the midst in a transition away from a global monetary system built upon debt and towards one built upon some type of asset emerging from the market, likely a function of gold in some way.

This story, which could be called imperial economics for its tendency to arise in conjunction with economies pursuing imperialism, has happened before, Roman empire, Hitler's reich, etc., and it is happening now in the United States. 'Occupy Wall Street' and other such political movements are simply symptoms of this economic system. Such systems have resulted in hyperinflation and a corresponding political re-organization before, and I don't think it will be different this time.

The only variable, in my opinion, is what type of political re-organization emerges after the debt crisis is resolved via a hyperinflationary collapse of some kind. Either way, gold should enjoy an exponential rise from here as we continue down this trajectory. If gold is re-monetized by the new economies that emerge post-hyperinflation, gold mining shares could do extremely well for a long time, leading the way to a new secular bull market in global equities that will last for over a decade.

If we do close below 1575 on the daily and head lower, I would be more wary of liquidity issues surrounding gold, and I will begin taking a closer look to see if we are seeing the gold price being increasingly fractured. If the gold price increasingly becomes fractured, meaning its price varies greatly dependent upon the exchange or counterparty/market you are dealing with, then it pays to understand how the market is connected to determine which price is most accurate.

Ultimately, though, I expect gold to defend 1575 and for price to head much higher. I think we are in consolidation before the next leg up, which will send us to $2,500 and beyond. I suspect the run to $2,500 will be executed with greater acceleration than the other leg in this bull market running over a decade long now.

Disclosure: I am long GDX, GDXJ.