Gold Is Knocked Down, But Not Out

by: Doug Eberhardt

Gold purchasing power has been steady the last year for various commodities.

Upcoming Fed Meeting Analysis.

International inter-connectivity of Banking System Still an Issue.

Gold had a range of $10 on Friday, closing down slightly in the middle of that range at a bid of $1,181.30. Silver has been acting weaker than gold the last 30 days, 6.34% lower while gold is down 2.78%. The last year silver is down 18.28% while gold is lower by 7.21%. This is not what investors in gold and silver want to see.

Meanwhile, in the last year the dollar is up 17.75%.

If you think about it lovers of gold, your dollars should have bought you 17.75% more of things today versus a year ago. If you bought gold a year ago, you are down 7.21% on that investment, but all is not negative with this because your purchasing power went up because gold is priced in dollars.

You could have bought oil with your dollars a year ago for $95 a barrel. Today you can buy oil for $59 a barrel.

A year ago gold was $1,273 an ounce and could have bought you 13.4 barrels of oil. If you exchanged that ounce of gold today worth $1,181.30 (dollars), you could buy 20 barrels of oil. Has gold been a bad investment if you were in the market for oil? Of course not. It held its purchasing power.

The same would be true for natural gas, grains, copper, and many other commodities. In fact, gold has held up quite well over the last year as far as its purchasing power compared to other commodities.

But what do you see reversing this downtrend in the price of gold? If the dollar keeps moving higher, do you see the price of gold falling more? I do. But for those who are contemplating adding gold to their portfolio, keep in mind there is a difference between the dollar price of gold and the purchasing power of gold.

Yes, if you kept your money in dollars instead of gold the last year you could have bought a little more oil. But you also have to recognize trends and the trend is gold down and the dollar up right now.

There is also the very good reason to own gold as insurance against unforeseen financial and economic issues that may arrive. Once gold bottoms however, the reason of buying gold as insurance may become even more prevalent but your average investor today only sees stocks or bonds as the place to be.

Well, Friday wasn't so good for stocks and I have been leaning short term negative on the stock market only because I don't believe the Greece situation is close to being resolved. And now neither does the IMF who is supposed to be paid by Greece as they are pulling out of talks. Ouch! The DOW fell 140 points on this news.

We may get some continuation of the stock selling on Monday. Gold mining stocks overall fell with the stock market.

I said in my Current Thoughts earlier in June that we may be topping in the 10 year treasury and it seems this may be the case. It also fits in with my thinking we enter a deflationary bout for a bit.

This week we have another Fed meeting. What's on their collective minds? While there won't be a move to raise interest rates at this point in time, they may very well take the retail news and again, "talk the talk" that they may raise rates in September. Too bad the good retail news was buoyed only by sub-prime auto lending boosting auto sales. In other words, without this allowance of less than credit worthy buyers of cars to boost auto sales, the retail report wouldn't have been so good.

How is it the Fed doesn't read the data the same way that I read it? As usual they will be behind the curve on anything that is needed to help the economy along. It's been almost a year now since CNBC folks started talking about the recovering economy and asking when will the Fed raise interest rates. During the last year I said the Fed may do a token raise of rates to keep the blind faithful glued to their every move and keep the perception that they know what they are doing (aka credibility intact).

We may finally get that move to raise rates during the September meeting. If we do, it will be the last move higher and from that point forward we should see a move towards more QE as the Fed is exposed as to not having a clue of what's really going on. Before this next round of QE we should see more signs of a recession and more talk of deflation. This will lead to more unprecedented Fed action to selfishly make sure their game continues as they can't have deflation.

In fact, one must consider also that the Fed is not in this alone. The ECB, BofJ and BofE are also playing this game and experiencing their own issues. The inter-connectivity of everything will become more apparent when you see some institution, probably in Europe or the UK, probably succumb to a bad bet or some rehypothecation issue and things maybe snowball from there. Yes, that's right, derivatives are still an issue, here and abroad. Especially abroad. Why else would they extend the Volcker Rule to 2017? It's to give banks in other countries more time to get their act together because of the #inter-connectivity with all other banks and financial institutions.

Here in the U.S. though all is perceived as fine in the financial world. No one is fearful of a repeat of the 2009 financial crisis. The Dodd Frank Act saved us from any future crisis. AIG, which re-branded itself as Chartis after the crisis, changed its name back to AIG. Bank balance sheets are doing well again thanks to the Fed. What could go wrong?

If you want to buy insurance via gold and silver for your portfolio, and I do view it as insurance even though I think we are headed to lower lows, then the best way to purchase right now is through dollar cost averaging into an allocation. This can be done through the various ETFs like (NYSEARCA:GLD) or (NYSEARCA:SLV) but the custodians for these ETFs are banks and the metals cannot be delivered to small investors and you have zero protection as there is no insurance on the holdings.

The preferred method of holding metals is by buying physical coins and bars. Yes, I may be accused of being biased as I sell gold and silver for a living, but I am still telling investors in metals to hold off on large purchases so I believe I do have some credibility as to being in the best interest of my clients. Naturally, when gold and silver take off and I am bullish, I will be accused of being biased then also. I look forward to this!

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Long physical gold and silver. Buying on dips.