{"id":24093,"date":"2011-09-26T12:25:45","date_gmt":"2011-09-26T16:25:45","guid":{"rendered":"http:\/\/countingpips.com\/fx\/2011\/09\/26\/gold-is-it-time-to-call-the-top\/"},"modified":"2011-09-26T12:25:45","modified_gmt":"2011-09-26T16:25:45","slug":"gold-is-it-time-to-call-the-top","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2011\/09\/26\/gold-is-it-time-to-call-the-top\/","title":{"rendered":"Gold: Is it Time to Call the Top?"},"content":{"rendered":"

By The Sizemore Letter<\/a><\/p>\n

\"\"<\/a>I know better than to say \u201cI told you so\u201d (see \u201cGold: Has the Bubble Finally Burst?<\/a>\u201d from early last week).\u00a0 The market gods tend to be jealous and vengeful and appear to take great pleasure in humbling the arrogant.\u00a0 So I know better that to tempt them.\u00a0<\/p>\n

Besides, even after last week\u2019s bloodletting, gold is still one of the best-performing assets of 2011; the September selloff did little more than erase August\u2019s parabolic surge.\u00a0 And, in the interests of full disclosure, I\u2019ve been on the record as a gold bear since it crossed the $1,200 mark (it was at about that point that the gold bull market entered the theater of the absurd with such novelties as ATM machines than dispense gold ingots).<\/p>\n

Still, it would only be appropriate if last week\u2019s action did<\/em> mark the top.\u00a0 The market gods may indeed have a twisted sense of humor, and Donald Trump\u2019s high-profile blustery rant that immediately preceded the crash would have been a good opportunity for divine smite.\u00a0\u00a0 After Trump accepted $176,000 in gold bullion as a security deposit from a new tenant, he announced loudly that \u201cIt\u2019s a sad day when a large property owner starts accepting gold instead of the dollar. \u2026 If I do this, other people are going to start doing it, and maybe we\u2019ll see some changes.\u201d (See \u201cTrump\u2019s New Gold Standard<\/a>\u201d)<\/p>\n

Whether other people follow in The Donald\u2019s footsteps and accept gold as collateral remains to be seen, but if they do they will no doubt require a few more ounces given the drop in price.<\/p>\n

The question on everyone\u2019s mind is \u201cWhat now?\u201d\u00a0 Does the gold rout continue from here, or can gold bugs look forward to a nice bounce this week?<\/p>\n

According to precious metals site kitco.com, the spot price of gold has continued its downward drift, falling to $1606 per ounce in Hong Kong early Monday trading ($<\/span>GLD<\/a>, $<\/span>GC_F<\/a>).\u00a0 And while anything can happen once the larger American markets open, there is reason to believe that this correction has a way to go.<\/p>\n

Gold\u2019s parabolic rise in August prompted the CME Group to raise margins on its gold and silver futures contracts on Friday by 21.5% and 15.6%, respectively.\u00a0 Given the recent price action and the uncertainty coming out of Europe, speculators are not likely to risk margin calls with aggressive bullish bets on the yellow metal at the moment.\u00a0 Furthermore, with the end of the year fast approaching, portfolio managers who have profited handsomely from gold\u2019s rise are more likely to take profits than to add to their positions.<\/p>\n

But perhaps most damaging is the psychological angle.\u00a0 Both market professionals and retail investors alike have been attracted to gold for its perceived status as a safe haven.\u00a0 But after the wild ride that the price of gold has seen over the past month, its credibility as a haven is almost laughable.\u00a0 What good is fire insurance that disappears the moment your house actually catches fire?<\/p>\n

When global markets violently sold off last week, investors fled to the U.S. dollar and to U.S. Treasuries for safety.\u00a0 Yes, that same fiat dollar that gold bugs love to hate and those same U.S. Treasuries that just got downgraded last month by Standard & Poor\u2019s.\u00a0 It appears that when the situation gets dire enough, ideology goes out the window.<\/p>\n

These are all shorter-term concerns, of course.\u00a0 But the long-term picture is even worse.\u00a0 Let\u2019s review some of the points that I\u2019ve made over the past year:<\/p>\n

    \n
  1. The inflation that so many feared in the wake of Bernanke\u2019s 2008 doubling of the monetary base never materialized.\u00a0 And guess what\u2014it\u2019s not going to.\u00a0 Anyone who cared to consult a history book would have seen that the bursting of property and credit bubbles are generally followed by deflation, not inflation.\u00a0 This was certainly the case in post 1990 Japan, the best historical example we have.\u00a0\u00a0 Gold\u2019s alleged value as an inflation hedge will be of little use in a decade of stagnant prices.<\/li>\n
  2. The dollar isn\u2019t being replaced as the international reserve currency any time soon.\u00a0 This is not some misty-eyed, patriotic support of my native land\u2019s currency.\u00a0\u00a0 No, to the contrary.\u00a0 America\u2019s monetary policy is misguided, and the fiscal policy coming out of Congress and the White House is criminally incompetent and damaging.\u00a0 But, to adapt Winston Churchill\u2019s quote on democracy, \u201cthe dollar appears to be the worst currency\u2026except for every other currency conceived.\u201d\u00a0 As grave as America\u2019s problems are, they pale in comparison to those facing the Eurozone and Japan.\u00a0 And no matter how much perennial presidential candidate Ron Paul might fancy it, there will be no return to a global gold standard.\u00a0 Given currency supplies, a return to a gold standard would almost certainly mean massive deflation and high unemployment.\u00a0 That is a political nonstarter, even in the age of the Tea Party.<\/li>\n
  3. Let us not forget that gold is not really an \u201cinvestment\u201d in the classic sense.\u00a0 Unlike a stock, bond, rental property, piece of productive farmland or even a piece of artwork that can be lent out for viewing, gold produces no income, nor does it create anything of value.\u00a0 It\u2019s a shiny trinket.\u00a0 And its value as a shiny trinket has been under attack for quite some time now.\u00a0 Gold\u2019s use for jewelry purposes has been nearly cut in half over the past decade, while its hoarding for \u201cinvestment purposes\u201d has risen by a factor of 65 (see \u201cGold Climax<\/a>\u201d).\u00a0 Meanwhile, many high-quality, dividend-paying stocks\u2014companies that will survive financial Armageddon\u2014are trading at valuations not seen in decades.\u00a0 (see \u201cWintel: The Buy of the Decade<\/a>\u201d)<\/li>\n<\/ol>\n

    Again, I\u2019m not calling the top of the gold bubble.\u00a0 I\u2019ve been down that rabbit hole.\u00a0 I\u2019ve angered the market gods before, and they have punished me.<\/p>\n

    Still, the short-term case for gold is questionable at best, and the long-term case even worse. We might<\/em> have seen the high-water mark in the price of gold for the next 30 years.\u00a0 Or, this could simply be a much-needed correction in a much longer secular bull market.\u00a0 Only time will tell.<\/p>\n

    But investors should use last week\u2019s gold-price plunge to get a little perspective\u2014and maybe a little humility too.\u00a0 Gold is not<\/em> a safe haven.\u00a0 It\u2019s not even an investment.\u00a0 It\u2019s a high-risk speculation that\u2019s had a great run.\u00a0 And that run, if it hasn\u2019t already, will come to an end.<\/p>\n

    If you liked this article by Sizemore Insights<\/em>, you\u2019d probably enjoy The Sizemore Investment Letter<\/em>, our premium members-only newsletter. Click here<\/a> for more information.<\/p>\n","protected":false},"excerpt":{"rendered":"

    By The Sizemore Letter I know better than to say \u201cI told you so\u201d (see \u201cGold: Has the Bubble Finally Burst?\u201d from early last week).\u00a0 The market gods tend to be jealous and vengeful and appear to take great pleasure in humbling the arrogant.\u00a0 So I know better that to tempt them.\u00a0 Besides, even after … <\/p>\n

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