Where
is the gold price today? If you're like many Americans, you have no idea whether
it went up, down, or sideways. Fortunately, I know my readers to be more
informed - you likely know that after falling from almost $1900, gold has been
trapped around $1600 since early May. But you may still be curious why despite
continued money-printing and abysmal US economic reports, gold hasn't been able
to hit new highs.
Here's
the truth: gold is currently priced for collapse. Many investors believe the
yellow metal has topped out and are selling into every
rally.
Nerves
of Tin
Being
a gold investor is tough business. The last thing any government or corrupt big
bank wants is to have a bunch of people putting their savings into hard assets -
and gold is one of the hardest of all. So we're constantly up against tides of
propaganda saying that gold has no value or is the refuge of
doomsayers.
The
effect of this is that even heavy gold investors are always waiting for the
other shoe to drop. When house prices were rising, no one was worried that the
market had peaked or prices were unsustainable. No one was asking whether all
the thin-walled McMansions going up would actually be worth anything in a
generation. But for gold, Wall Street has been shorting it all the way
up!
Nowhere is this pessimism more evident that in gold mining stocks. Rising inflation has driven production costs higher, but the mistaken belief that inflation is contained and Treasuries are a safer haven is keeping a lid on gold prices. As such, many of the major producers have missed their earnings projections, and their share prices have been punished. This has placed a cloud over the entire sector. In fact, the P/E ratios of major gold miners are near record lows. Stock prices reflect future earning expectations, and judging by the low P/Es, Wall Street expects future earnings to plummet. This likely reflects their bearish outlook for gold, which is generally viewed as a bubble about to pop.
Chronic
Memory Loss
Unfortunately,
there is no public validation for those who have proved the gold doubters wrong.
A couple of years ago, I predicted gold would cross $1500 and even my own staff
thought the call was too risky, too extreme. But I knew then, as I know now,
that at the end of the day the gold price is not a mystery - it's a proxy for
dollar weakness.
Since
most investors do not truly understand gold's economic role, they assume the
10-year bull market must be a mania. But manias show parabolic growth detached
from any fundamental driver. The definition of a mania is the bidding up of an
asset quickly and beyond all long-term justification.
Gold,
however, has grown steadily in inverse correlation with real interest rates, as
explained by Jeff Clark and Mark Motive in past issues of this newsletter. As a
reminder, here's a chart detailing the correlation:
The
Opportunity of the Decade
After
spending the previous fall and winter testing new nominal highs above $1800,
future investors may come to view spring and summer 2012 as the opportunity of
the decade. Gold has shown its strength and retreated. While most investors will
take that as a signal that the market has topped, some will take advantage of
the general trepidation to add to their positions at hundreds of dollars off the
highs.
While
I think gold is a bargain at $1900 considering today's circumstances, the market
phobia of a price collapse is allowing us to buy at well under established
highs. It's as if you already wanted to go swimming, but you found out when you
got there that the pool was heated.
What
Happens Next
I've
seen markets like this before, and by making some reasonable inferences, I have
a good picture of how this could play out. Gold will continue testing the $1600
barrier until it surprises to the upside. This could be spurred by the
announcement of QE III, a calming of fears in Europe, or any shock to the
Treasury market. Treasuries have temporarily overtaken gold as the primary
safe-haven asset. Once that dynamic is broken, I believe the counterflow into
gold will be tremendous.
Right
now, there is a haze over investors. Frightful news from Europe and a slowdown
in Asia have shaken confidence in any asset that doesn't have the steady track
record of US debt. But as I often remind my clients, past performance doesn't
guarantee future results. Any news that wakes investors up to the coming
collapse of the Treasury market will likely trigger a rush into the one asset
with a track record as long as civilization itself.
Prepare
For Collapse
The
key to this market is to understand that a price collapse is coming - but not
for gold. Instead, the market for US dollars and dollar-denominated debt is
headed off a cliff, which will send the price of precious metals
soaring.
Now
is a time for uncommon confidence. Everyone knows Treasuries to be safe, just as
they knew house prices would always rise. Then as now, gold's value and utility
are doubted. But my readers know better.
Peter
Schiff
CEO of
Euro Pacific Precious
Metals
|
8.03.2012
Priced For Collapse
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