Scared of falling Gold prices?
Looks like we are having another downdraft in the precious metals sector. In light of the carnage that happened last year it seems that over every little correction looms the spectre of a repeat washout.
For those of you who are curious what this downturn has done to Goldbug sentiment, I have prepared a survey where people can vote as to where they think gold will be two months from now.
I've also compiled a list of "pros" and "cons"... things that would support gold and things that point to a lower gold price:
Reasons for Gold to fall
- The stockmarket has been climbing without any improving fundamentals long enough to be due for a significant correction and the gold price has followed the DOW down 51% of the time in the last half of 2009 (gold stocks followed the DOW down 71% of the time).
- China has indicated that they plan to begin monetary tightening.
- There is hot money right now in gold that will likely flee now that it has stopped going up.
- The “dollar carry trade” could unwind, removing many gold hedge fund positions.
- If the government is unable to print more money than is being lost in the economy due to loan payoffs, defaults and decreased money velocity then our economy will tilt again towards deflation. Even if you believe that the government will eventually be successful in creating enough inflation, it is not impossible that they fall behind the curve for a while if things start to happen quickly, resulting in a temporary loss in gold prices.
- JP Morgan and the other big banks seem to be able to create nearly infinite amount of short positions to keep the price down and the political will to stop that seems to be largely absent.
- The amount of paper gold substitutes such as GLD is arguably much greater that the actual amount of real gold available, causing dilution of the investment demand in the same way as when a company issues a large new set of shares.
- Gold is under a downward sloping trendline and well under its 50 day moving average.
- Gold stocks (GDX) are under a downward sloping trendline, well under its 100 day moving average and is now lower than its December 2009 lows.
- Dehedging from gold companies may be almost over now.
- As we saw in the Fall of 2008, Gold (and certainly not Gold Stocks) do not necessarily benefit and can in fact be substantially harmed by safe haven flows in a panic.
Reasons for Gold to rise
- Central banks around the world continue to print money without end in their attempt to keep the financial system solvent. For example in December alone, Freddy and Fanny were given an infinite checkbook by the government.
- None of the excess that caused the financial crisis appear to have been solved:
- Banks are still massively overleveraged.
- Banks know that if they take on risk they will be bailed out, so they are still taking on huge risks.
- Unemployment is still skyhigh with no indication as to where any new jobs might come from to bring it down again.
- The is a huge overhang of homes that are technically in default but that are being held out of the market by the banks.
- Alt-A loans and Options ARMS are resetting this year and they are bigger than subprime.
What do you think? Are goldbugs on the launchpad for the moonshot or are we doomed to another thrashing ala 2008? Participate in our survey and see what others believe.