I take the comments on my articles very seriously and always try to elaborate on any concerns readers may have or correct any inaccuracies in my positions. In this case I would like to elaborate on my bearish stance on gold and adjust both my short term outlook and long term outlook downward.
My research has led me to believe that gold prices are already in a bear market. The only thing propping them up is speculation about future inflation. This, and a perverse notion among retail investors that recessions are bullish for gold. However the institutions know this speculation is unsustainable and when they decide to dump it will wipe the retail investors out.
What the events from 2007-2014 have taught us is that the relationship between money printing and inflation has been completely divorced in modern economies. The data from Japan, Europe and the U.S shows that no matter how dovish the central banks get it will not result in significant price increases during a recessionary economy, an economy where trillions of dollars in wealth has already been deleted and people are simply too scared to spend what they have left.
Less money chasing the same good results in deflation! End of story. What good does printing money do when the banks are too scared to lend and people are too broke/unemployed to qualify for credit anyways?
What drives the price of gold?
The common man buys gold because of fear. This includes fear of things like war, political instability and economic instability. But these factors are not the things that actually move gold, they only lead to speculation about future inflation.
Most retail investors contend that the price of gold is manipulated. They are right. Gold prices are set by large institutions, central banks and governments, retail investors have no voice. It doesn't matter if we all went and bought gold tonight. The institutions are able to move the gold price more in an hour than thousands of us converting our life savings into gold bullion.
The only way to understand how the price of gold will move is to understand the point of view of the institution. You can't invest in gold from the perspective of the little guy because the little guy will not win.
Institutions buy gold as a hedge against inflation.
Institutions buy gold to protect themselves against inflation and nothing else. Not fear, numbers. If that inflation does not materialize they will sell off their gold and the retail investors will be left holding the bag.
What economic history tells us is that recessions are deflationary periods. During a recession wealth is deleted and people begin to spend less money. When consumer spending drops prices follow them and we end up with deflation. This is how the economy corrects itself. In trying to prevent recessionary deflation, central banks around the world are fighting against gravity. They will not succeed.
Don't believe me? look at these graphs.
Japan has been printing staggering sums of money for over a decade. No inflation - in fact consumer prices are actually going down!
Quantitative easing and dovish Fed policies did not result in significant inflation in the United States:
The overwhelming evidence shows that if the global economy enters a situation of prolonged recession it will result in deflation no matter how large the monetary base is. If we go into recession this year, with the federal funds rate at nearly zero, what options would the central banks have left?
There is no amount of money printing that will stop deflation in a full fledged economic collapse. Once the institutions realize this a mass sell off in gold will occur, driving its price down to its cost of production at $300 to $700 an ounce. Betting on recessionary inflation is betting against gravity and betting on gold in 4/1/2016 is betting on future recessionary inflation. If you want to make money on gold ride the speculation and sell before the institutions.
Disclosure: I/we 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.