Gold Going To $500?

Robert Wagner

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Yesterday on CNBC Fortress Investment Group’s Michael Novogratz stated that he wouldn’t be surprised if gold dropped all the way back to $500.

I personally think gold is toast…if you were a gold bull and you got QE and then QE7 from the Japanese… nothing did it and we peaked out at $1,900 two years ago…if you run the gold chart over the NASDAQ over the Nikkei chart in 1989 they are identical…once bubbles pop they go all the way down.

He followed up his comments with:

Gold was a classic bubble…it had such a compelling story…bubbles come around spectacularly good stories that are believable. So once everyone believe it, there is no one left to buy…It wouldn’t shock me to see gold back around $500.

Other interesting information gathered from the discussion is that the markets have been signaling the end of gold with the miners failing to participate in the rally and that more people have been selling than buying the SPDR Gold Trust (GLD). The one analyst puts the cost of production of gold at around $1,100/oz, but in order to encourage such capital intensive firms to cut production, prices would likely have to fall below $1,100 to get them to decrease production.

The comments were so captivating that Yahoo made them the poll of the day.

POLL

Fortress Investment Group’s Michael Novogratz believes the gold bubble is ready to burst, sending prices as low as $500. Do you agree?

Others on CNBC joined the gold bearfest, as highlighted in this video “Has the Gold Bubble Burst.” The key points are the same points I made in a series of articles indexed in this article “Gold, its OK to be wrong, its not OK to stay wrong.

The key arguments against gold are that the key arguments for gold were myths, they were compelling myths, but myths all the same.

Myth #1: QE would lead to hyperinflation

Myth #2: The US Dollar would collapse

Myth #3: Gold is a better currency than well a managed fiat currency

Myth #4: Gold always holds its “intrinsic” value, “an ounce of gold bought a nice suit in roman times and it buys a nice suit today.”

All these myths made a very compelling argument, and that is what made it so very difficult to have an intelligent, reasoned, logical, and unemotional discussion about the value of gold. The historic examples of “printing all this money out of thin air” leading to inflation were well entrenched in the market’s psyche. The problem is, the Federal Reserve was designed in just a manner to prevent uncontrolled “printing money out of thin air.” The modern monetary system simply doesn’t fit the hyperinflation model. The Fed doesn’t just arbitrarily “print money out of thin air.” The Fed is collared by a “duel mandate” that restricts its money printing within a set a parameters, both of which are beneficial to the economy and financial markets. If anything good comes from the fall in gold prices, I hope it is that people go back and study why the system didn’t collapse, why we don’t have hyperinflation and why we didn’t repeat the Great Depression.

In my opinion the Federal Reserve did an outstanding job, and the people in the financial industry that were pushing gold using flawed concepts and inappropriate historical analogies that undermined the efforts of the Federal Reserve not only did themselves, the investors that followed their advice and the economy a disservice, they did the Nation a disservice for unfairly maligning an institution that when all is said and done was the one institution that stood on text book principles and kept the Nation’s financial system from collapse. Years from now textbooks will write about the success of the Federal Reserve’s actions post 2008 crisis, and the gold bubble will join Tulipmania as a freak market anomaly.

The other compelling arguments made in the videos is that gold now has some competition. When interest rates were low and equity prices were falling, gold was the natural alternative investment. Conditions have changed however and now equity prices are going higher, as are interest rates and gold prices are going lower. As I wrote in my first bearish article on gold, a return to “normalcy” was the greatest threat to gold. As fear subsides, interest rates return to normal and the equity markets rebound, the justification for gold evaporates.

The general theory I outlined was that gold wasn’t trading at its current level because of a fear of inflation, but instead fear itself and investors were using gold as a safe haven investment. Investors are using gold as a substitute for treasury bonds. If treasury bonds aren’t paying much in interest, why not hold gold? Gold at least has the comforting aspect of being something real and can be physically held in case of Armageddon. The theory I outlined was that economic strength would drive interest rates higher, and unlike past market cycles, higher interest rates would be welcomed by the equity markets and signal a return to “normalcy.”

In conclusion: More and more press is being devoted to gold being a bubble, and that isn’t good for gold investors. Rarely is it a good thing to be trapped on the backside of a bubble. The press is finally asking the 800lb gorilla questions that they avoided asking when gold was on its way up. The key question that needed to be asked was “if printing money is supposed to drive gold higher, why then is gold falling after printing all this money?” Gold peaked 2 years ago, and there has been a whole lot of money printed since that time. The market action of gold totally disproves the most compelling argument investors had for owning gold. In my opinion, gold will continue to decline as the economy continues to recover. Unless someone can create an argument for a repeat 2008, I find it hard to create a scenario where gold will retest its old highs anytime soon. The facts are, if the myths were true, the perfect case for much higher gold has already passed. Talk has turned from QE to unwinding, and when that happens, we won’t even be “printing all this money out of thin air” anymore, so that foundation won’t even exist anymore.

Disclaimer: This article is not an investment recommendation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor.

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