I’ve written many articles on gold, highlighting many themes that point to a lower price of gold. Because this is such an unpopular position to some members of the investment community, I often like to write about videos and/or articles that support my position. It never hurts to have some confirmation to bolster my position.
One of the themes that I have been persistently hammering is that a bet on gold is a bet against the Federal Reserve. I’ve pointed out many times that one of the oldest and most reliable adages of the market is “don’t fight the Fed.” Much of the support for gold has come from retail investors that watch cable TV shows like Glenn Beck, vote for Ron Paul and have a very anti-Government philosophy. Their blind hatred of the Government doesn’t differentiate legitimate and positive roles of the government and the illegitimate and destructive roles the government plays. The Federal Reserve is part of the Government and therefore evil. The analysis really doesn’t go much deeper than that.
This blind adherence to an ideology has driven gold to levels that make no sense, especially in the face of no inflation. I’ve never read a text book that described deflation as a driver of the price of gold. I have always been taught that gold is an inflation hedge, and not much more. Because of this classic relationship that is taught in almost every finance and economic book on the subject, for gold to do well when we are teeter on deflation means that the buyers and holders of gold must have an expectation of inflation. 1/2 of the Fed’s duel mandate is for stable prices, and its stated inflation target of 2.5% is hardly something the markets would fear and demand gold as a hedge, therefore a bet on gold is a bet against the Fed, something I’ve pointed out, and is alsodiscussed in this video. If there is one thing the Fed knows how to do, it is fight inflation, and to think the Fed will allow inflation to develop in the future is simply going against its history going all the way back to 1979.
The video also adds support of another theme that I have been hammering, that being the falling tail risk. The facts are gold has had an ideal environment to reach new highs, but even with tail risk events, gold has failed to perform, and the likelihood of a major tail risk event like a possible collapse of the Eurozone are falling. As Dennis Gartman points out, if good news isn’t bullish for a commodity then it is in a bear market.
In conclusion, the markets are finally awakening to the fact that the pillars that were holding up the price of gold are made of sand. The US Dollar isn’t going to collapse, in fact it will likely continue to strengthen, inflation is not likely to develop, we aren’t going to “End the Fed” and fiscal policy, not monetary policy is what is holding back the US economy. Gold is the emperor that has no clothes, and the markets are just now beginning to see the naked truth.
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. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.