Wednesday, December 14, 2011

Major Gold Correction to End 2011

Unless there is a major catastrophic event in the next couple of weeks, gold will not hit $2,000 per ounce before the end of 2011.  In fact, the price may will probably be below $1,600 at the end of the calendar year.

Gold had a major correction today (December 14).  It was down over $75 per ounce.  It is currently below the $1,600 mark.  This is quite bearish for the yellow metal in the short run.  The good news is that if you have been late to the game and are looking to buy some gold, there is some opportunity to do so.

It is hard to say where the bottom will be this time.  There are a lot of uncertainties out there, which can be good or bad for gold.  Today, it happened to be bad.  The euro has been extremely weak this week, which has meant a strengthening of the dollar.  This has led to a big decline in the price of gold in terms of U.S. dollars.  People wanted to get out of euros this week and they are turning to the U.S. dollar this time, instead of gold.

There continues to be a tug-of-war going on with the economy.  The monetary base has tripled in the last 3 years and most of this newly created money has gone into banks as excess reserves.  There is a tug-of-war between inflationary forces and a deep recession.  Both sides might end up pulling each other into the mud pit and we may end up with both eventually.

For a little while, it looked like we might see a little mini-boom, courtesy of low interest rates and easy money.  Today, it went the other way and it looks like we might be headed for a deep recession.  The 10-year treasury yield went down today and is pointing to continuing fear.

This roller coaster will continue until one side wins out (either way we lose) or until there is a big shift in Fed policy.  The Fed has been tight (monetarily speaking) since QE2 ended in June.  We will have to see how bad the economy will have to get before they entertain QE3.  While the best thing would be for the Fed to do nothing and the government to dramatically cut spending (which would trigger a recession), I don't see that as a likely outcome right now.

I don't like making predictions, but I'll do it anyway this time.  I think there is an 85% chance that gold will be higher (in terms of U.S. dollars) one year from today than it is now.  If the price of gold is lower in one year than it is today, then I think there is a 99% chance that we will be in a deep recession at that point.

1 comment:

John (Ad Orientem) said...

I don't normally engage in speculative investing so take this with a grain of salt. That said, if I were a speculative investor I would be betting that the gold bull market is not done. The dollar is rising due to the mess in Europe and there are fears (not unreasonable) that we could be stuck in the middle of a multi-year depression. In that scenario ultra-high end government bonds are where you would be putting your money. But our country and most of the developed nations are still fundamentally broke. And I see no way out of that debt trap that does not include money printing on a much larger scale than what we have thus far seen.

Gold is notoriously volatile. I would see this as a point where those who don't have any gold exposure might want to seriously consider scaling into gold for as long as this correction lasts up to maybe 10% of your portfolio, unless you are using the Harry Browne Permanent Portfolio.