Gold Below $500 an Ounce?

Add Fortune Magazine and Senior Editor, Shawn Tully to the growing list of publications that continually try and slam gold.  Please consider Beware the 4 new asset bubbles.

In this article, Tully makes the following comment regarding gold:


Investors are rushing to gold, because they rightly fear far higher inflation in the next couple of years and want to hedge against both rising prices and a declining dollar with a commodity that, they claim, has a fixed supply.

Since early 2009, the price has jumped to $1,100 an ounce from $875, triple its average price between 1990 and 2004. Yet the supply of gold is far more fluid than the gold bugs admit, partly because mining companies are investing heavily to increase production.

The real threat: Prices are so high all over the world that people who once treasured their gold jewelry are now rushing to sell it. Swiss refiners are offering irresistible prices for bracelets and brooches, “cash-for-gold” stores are in Chicago malls, and suburbanites are hosting Tupperware-style parties where neighbors show up to hock their gold teeth.

When this happened in the early 1980s with silver, prices plummeted from $50 to $15 in less than a year. Look for gold to end up below $500 an ounce within two years.

The first thing that jumps out is his statement, “because they rightly fear far higher inflation in the next couple of years and want to hedge against both rising prices and a declining dollar.”

If Tully understands this, then wouldn’t it be prudent to include this type of asset in one’s portfolio, especially with the well known trend of a declining dollar?

The next thing that jumps out at me is his speculation about gold production without any facts or sources.  “Yet the supply of gold is far more fluid than the gold bugs admit, partly because mining companies are investing heavily to increase production.”

Here’s a source for you Shawn Tully.  An unbiased one at that.  Please see: Gold production in the world (2009).

Excerpt: “a very long time is needed for a gold mine for an investment to be effective (ie to produce the first gold grams). Today it is over 7 years that the rising price of gold has begun. Finally, there is still no sign of resumption of growth in gold production in the world.

In fact, if the price of gold falls for a bit here, the consequences would be less production.

A decline in the price of gold would cause a sudden drop in gold production. The inevitable consequence would be a very violent increase in the price of gold. For this reason, the gold price should continue to increase at the same pace. A diminished production of gold is then maintained.

I’ve been calling a pull-back in gold and we’re seeing this occur, barring any “external influences.” But it is the rise of the dollar that is causing this pullback, not the production of more gold or the results of Tupperware parties.  Even the U.S. Mint is continually running out of certain types of gold coins a few times a year and as recently as Nov. 26, 2009.

Lastly, Tully compares the fall in the price of silver from $50 an ounce to $15 an ounce in 1980 as a precursor to what will occur now with gold.  No mention that the speculation in silver at that time was fueled by the attempted manipulation of the Hunt Brothers who gathered up half the world’s supply of silver.  Yes, their speculation did cause a bubble at that time.  The smart investor was selling into the euphoria.

But gold today is nowhere near bubble status just because there may be many ads on TV trying to get people to turn gold into cash.  This current fall in the price of gold isn’t the popping of a bubble because of a temporary dollar rise either.  Anyone who understands the economics of it all knows this.

Will gold go below $500 an ounce?  While some gold bugs may be calling gold to fall to just below $700 an ounce, I don’t see gold falling much below that.  But as I always say, a holder of gold cares not that it falls to $700 or lower, on its way to $2,000 and higher.  The traders of gold would love to drive the price down, exposing the weak hands.  Then they’ll drive the price back up.  That’s what traders do.  But the Dollar Index is the key.  Keep an eye on it for clues.

One other observation to consider is just two months ago, this Fortune Senior Editor produced an article called “Dump the dollar! Buy gold!” where he was touting a fund manager who was bullish on gold.   I guess like a good politician, journalists play both sides.  Anything to make a buck and sell a magazine!  But unfortunately this attempt to call gold a bubble doesn’t tell you the whole story.  The Dollar Index does.

Just remember, anyone who writes an article about the price of gold falling and doesn’t connect it to what the U.S. Dollar is doing, isn’t worth your time reading.  There was no mention of the dollar rising in this Fortune article.  But it is worth my time to expose what’s really going on with gold.

That said, I do agree with Tully’s assessment of stocks.  He must have picked up a copy of Ed Easterling’s book, “Unexpected Returns.”

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About Doug Eberhardt

Doug Eberhardt is a 28 year financial services veteran and precious metals broker selling gold and silver at 1% over wholesale cost. Doug has written a book to help investors understand how gold and silver fit into a diversified portfolio, how to buy gold and silver, and what metals to buy. The book; “Buy Gold and Silver Safely” is available by clicking here Contact phone number for Buy Gold and Silver Safely is 888-604-6534


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