Being one of the few out there who sells gold and has called gold lower since September of 2011 when the dollar hit bottom, and having called a summer rally most recently in June, I turned cautious on August 12th for short term traders, expecting a bounce in the dollar. The double top for gold has turned into an extended formation in the chart as seen below, and I think we are about at the highs based on the price action today. We also saw the gold mining stocks get hammered from their intra-day highs today, despite the price of gold not pulling back that much.
In this article I will show the dollar and gold charts again and try and predict short term price action in gold, and also explain more on what’s going on with the dollar that will affect gold’s price over the short term. Lastly, I will lay out the reasoning why gold could fall into the end of the year and why January may just be a stellar month and 2014 and beyond, stellar years. But we have to let this deflationary credit contractions play out a little longer.
Positives for Gold Over the Short Term
1. We are fast approaching $17 trillion in national debt.
Congress is set to battle it out on increasing the debt limit from its current agreed upon limit reached in May of $16.7 trillion to some higher number like Congress always does. We are scheduled to run out of money to pay our bills mid-October, according to Treasury Secretary, Jack Lew. This lack of caring about debt, should be pushing gold much higher than it already is the past 4 years, yet since we have had a bit of a rebound in the economy, a higher stock market and a Federal Reserve propping everything up, the debt limit is ignored. Senator Barbara Boxer even went so far as to introduce a bill to Congress dictating that those in Congress won’t get paid unless they raise the debt ceiling. Nancy Pelosi earlier this year stated she wants President Barack Obama to use the 14th amendment and raise the debt ceiling anytime he wants by Executive Order. What is the government’s FICO score anyway? Oh, that’s right, they don’t have to play by the rules everyone else does.
2. September is typically a good month for gold.
The 2013 average price for May was $1,413.50 and today’s price is $1,418.17. In 2011 and 2012 we had nice moves up in gold from May through the end of September. While have had a nice rebound from the bottom for gold. My research shows me that no matter what September brings, we will head lower through the end of the year.
3. Fear factor in regards to Syria issues.
This is of course a wild card and more oil related, but any trouble in the world typically causes gold to rise a bit. It is simply fear of the unknown that causes this. We saw it with the turn of the century in 2000. We saw gold end the year up in 2007, 2008 and 2009 with the financial crisis upon us. I don’t see anything long term going on in Syria like we had with Iraq and presently with Afghanistan. This is a wait and see issue as to what Russia might do as Syria is their ally. It’s still a good reason to be in gold for insurance.
4. Weaker dollar overall. There is still a chance the dollar may fall on the index a bit lower to the 80.50 range, but this would still be a double bottom. If for some reason we were to break 80 on the index, then I would want to be in gold. I just don’t see that happening.
Negatives for Gold Over the Short Term
1. I see 80 as the long term line in the sand the dollar will bounce off of and head back to test the highs near 88 as the longer term chart below shows.
2. Despite all the above debt issues, S&P in June gave the U.S. Credit Rating a label of “stable,” up from “negative,” but left the rating at AA+. The S&P still gives Australia a AAA credit rating, so they still haven’t learned their lessons. They do give Spain a BBB-, which ironically is the same rating as both Iceland and India. The PIIGS (Portugal, Ireland, Italy, Greece and Spain) average as a group less than BBB. Despite all this negativity, the Euro has become stronger versus the dollar of late. This is only because of France and Germany’s leaders banding together with Greece and the other Southern Countries in trouble. So far, it has worked. But sooner or later the loans to Greece and other factors that have helped temporarily prop up the Euro will have to come to roost. The problems though, may start in Japan or China in their banking system however. Everyone is interconnected these days and that’s what led to multiple bailouts here in the U.S. by the Fed and the main reason you own gold as insurance.
3. Traders back from vacation (whipsawing the markets). We saw some extreme volatility in the gold and silver mining stocks today, with them up big early as a result of the gold price being higher, and then down big late. What would cause such a downturn if not speculation that the tide might be shifting? You can see this volatility in the ETF’s DUST and NUGT below.
4. Deflation vs. Inflation
The debate still goes on about inflation and deflation with most gold bugs not understanding what they really represent. This will be a serious focus of one of the chapters of my forthcoming book, “Illusions of Wealth.” As many of you know, I have been in the deflation camp.
As Boomers cut back heading into retirement, it will be an additional drag on the economy. Their views are already negative on the economy. With no real velocity in the economy (defined as money circulating in the economy), things come to a standstill. This is deflationary action.
Housing may also be close to topping. Think of what happened to cash for clunkers when the government stopped stimulating. The Auto industry contracted.
While many will look at inflation in the everyday things you buy, the CRB Index has actually been declining since about the time the dollar started climbing in 2011.
Side Note: Oil of course is a different issue. I have always liked oil and will be recommending investments in my next book in oil for the simple reason you can count on the U.S. to be meddling somewhere, especially the Middle East. It seems this is true whether it is Republican or Democrat leadership.
With China GDP falling, expect there to be pressure on commodities as a whole. While consumers may still be spending in China, they are the last to know, same as the consumers who were borrowing on their houses here in the U.S. precipitating the last financial crisis. China seems to be following the same path. Yet we have done nothing but have our credit grow larger and watch our banks and corporations play the derivatives market like never before as seen in the following graph and table. The Dodd/Frank Financial Stabilization Act has done nothing but take us back to where we were. The data for the chart below can be found here in the Flow of Funds report.
F.1 Total Credit Market Borrowing and Lending
To sum this section on deflation up, the amount of derivatives were contracting in 2009 and 2010 with the financial crisis ending the lives of some corporations like Lehman Brothers and seeing others swallowed up by larger players with back room deals with the Fed. The Dodd/Frank bill was passed and everyone learned their lesson right? NO – what has occurred is the Too Big To Fail (TBTF) banks now know they have a life-line in the Fed and are doing whatever they want. Why? Because the Fed is the entity that handles oversight of the Financial Stabilization Act! The Wolf is in charge of the Hen House and guess who the Hens are? This is my number one reason for having possession of gold as insurance yet you never see anyone write about it.
So even though this is under the “negatives” for gold short term, the derivatives issues is still a longer term (probably starting next year) recipe for disaster for our entire financial system.
In conclusion, I didn’t address QE as the entire last year when the Fed was implementing QE, the price of gold fell, and today with talk of tapering, the price of gold is rising. The dollar is what I look at for the short term. At some point, as I have said, I will become dollar bullish and gold bullish. I have explained this in the past but will be explaining more in my next book.
As I state in many of my articles, the way to invest in gold and silver is to dollar cost average into a position. I will personally be happy to speak with you about how to invest in gold and silver and what to invest in if you are willing to learn how gold and silver might fit into a diversified portfolio. Of course a good place to start is the first book I wrote, Buy Gold and Silver Safely.