Over the past few weeks the gold bears (DGZ, DZZ) have taken over the press once again with numerous people stating that the gold bull market is over and 2012 will be the first year in more than a decade where gold will be negative over the year.
Nothing can be farther from the truth. The current sell off is not uncommon within the yearly timeframe as the summer months are well known for seasonal weakness.
But looking out over the horizon the fundamentals could not be more bullish for gold.
First, we have a Greek election which delivered the bullish results, bearish statements, and a European continent which blinked. The results were bullish in that the NDP party was able to win the election over SYRIZA who threatened to renegotiate the austerity agreement between Greece and the EU. The NDP then announced their intention to renegotiate the austerity agreement and the EU blinked.
China is talking about more easing which indicates that the slowdown is not bottoming as intended and economic growth is slowing. This should come as no surprise as the dithering emanating from Europe has caused businesses to scale back expansion plans and wait for more clarity.
Already we have seen European banks begin a retrenchment process exiting the global trade financing markets with Japan and China jumping in to fill the void with swap agreements between themselves and their smaller neighbors.
In the US business are waiting to find out the results from the November Presidential and Congressional elections along with results from the Supreme Court regarding the legality of Obamacare.
We know that Federal Reserve Chairman Ben Bernanke stands ready to apply additional stimulus if necessary in the event the economic slowdown becomes more than transitory as it appears we may be heading for a recession.
All of this we know and it is baked into the price of gold. What we do not know is the nature of the black swan out on the horizon which will take the price of gold to new highs. Back in 2007, the price of gold shot up by 10% when it was announced that the Central Bank of India had purchased half of the IMF's gold reserves for sale. The black swan is up there in the sky, circling, and waiting to land.
Meanwhile, the gold bulls wait patiently as they know the house of cards is wobbling. The $2 billion dollar loss by JP Morgan due to trading by the CIO out of the London office is a sign that the financial system is beginning to fray around the edges. Large trading losses are occurring with greater frequency and this loss will not be the first large loss. Others will come as we have not learned the lessons from the crash in 2008.
The next crash, when it does occur, will come without warning and leave market participants shocked at the aftermath. At that point in time, gold will assume its rightful place in the world financial markets as a store of value and currency.
Disclosure: I am long DGP.