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Gold's Underpinnings May Turn Out to Be Weak

|Includes: ABX, ASA, AU, FCX, GG, GLD, GOLD, Newmont Mining Corporation (Holding Company) (NEM)

It seems an easy momentum call to invest in gold, yet there may be a dramatic revision.  The gold bugs have bloomed again, and the advertisements for cashing in your gold jewelry are everywhere.  For those of us who have lived long enough, that was a good time to sell.  I can remember a silver service that in 1979 was suddenly insured for $20,000 before the collapse, when it got reappraised back to the same price it was purchased for.

Gold seems to go up on Fed news, and seems to ignore the rest of the economic news.  But TARP, which was supposed to be the government printing money again, has all but been paid back.  And it may turn out that the Fed is not a mad hatter, after all.  And bonds it is buying today, it may sell tomorrow.

GM successfully did its IPO, and again the government has been paid back.

The principal problem with gold as inflation hedge is unemployment, which is logged in at 9.5% in the official statistics, but is probably over 15% and could be over 20%, according to Shadow Government Statistics.  This will be a very potent and persistent downward force on the price of goods.

And the main effect of unemployment is in home pricing.  Foreclosures hit a new record in the third quarter, up to 2.45% of all prime fixed rate loans.  And the Fed's action is an attempt to try and stabilize home prices, because if home prices end up in a tailspin, then it will be cash and not gold that will be the big winner.

For those in love with gold, every piece of news is an occasion to own more gold.  It's a inflation hedge, a deflation hedge, it's a partridge in a pear tree.  Nevertheless, after the economic problems in the late 1970s, early 80s, gold collapsed, and remained there for decades. 

In the late 1970s gold got up to $750, but two decades later it still had trouble getting up to $300.  I would be leery of graphs showing the 1970-1980, and graphs showing 2000-2010, when all the action is up.  No matter what the argument, we are probably nearer to the end of the cycle than the beginning of the cycle, and as the recent events in Chile remind us, mines can collapse.

Disclosure: Long GG