Dr. Phil McGraw preaches "There's no reality -- only
perception." We see the world through individual lenses, shaped
by our past, attitudes and personal agenda. That's evident in
gold markets this week.
Now that the yellow metal has melted nearly 30% from its
September 2011 high, those who see the glass half-full claim gold
will rebound from oversold levels on bargain buying and short
covering. Those who see the glass half-empty say it stands to
crash another 50% and as much as 80%.
Global Monetary Stimulus
Cheerleaders contend the fundamental reasons for gold remain:
central banks around the world are slashing interest rates to new
lows, buying debt and printing more money, thereby devaluing
paper currencies and pumping inflation, which bolsters gold
After the European Central Bank cut its interest rate to an
epic low of 0.50% in earlier this month, 12 other countries --
including Australia, India, and South Korea -- clipped their
Those follow the Bank of Japan's bold bond buying plan -- much
bigger as a share of the economy than America's under the Federal
Reserve. The BoJ action has sent the yen plunging.
"It is a currency war and those who inflate first, get the
Przemyslaw Radomski, CEO of Sunshine Profits
, a gold and silver trading advisory in New York City wrote in
client note. "They are short-lived because other countries will
follow and the ultimate result will eventually be huge inflation
on a global scale."
Gold bears, on the other hand, argue that gold will meltdown
further for the very same reasons. But they believe global
central bank policies will lead to deflation and eventually blow
up in their faces.
"If governments are actively fighting deflation, which is
exactly what they're doing, then deflation is the trend, not
inflation," Harry Dent, founder of HS Dent, an economic and
forecasting firm in Delray Beach, Fla., wrote in his "Survive And
Prosper" newsletter. "But we only see the deflation when such
artificial stimulus fails to create growth."
He projects gold will collapse to "at least $750 an ounce over
the next few years" and even as low as $280 an ounce, down 46% to
80% from Tuesday's price. He lists six reasons why the global
economy will spiral south over the next two years:
1. Spain's real estate bubble continues to deflate. At some
point it will overwhelm the banks and Germany and the European
Union will lose faith in bailouts.
2. France's economy continues to slow and its population
continues to sour on the euro and bail out plans for weaker
3. Demographics in the strongest countries in Europe, like
Germany, Switzerland and Austria, will peak in spending and go
off the demographic cliff in 2014 -- just like the U.S. did in
4. Commodity prices, which keep falling in a vicious circle,
hurt exports and growth for emerging countries, who then buy less
from China, hurting its exports and growth, so commodity prices
go down further.
5. If Japan succeeds at raising its growth and inflation
rates, it'll see bond yields rise and the government will faces a
massive rise in its interest expenses. The bond markets will lose
faith in Japan.
6. The wealthiest 10%-20% (of the population), who control
about 50% of consumer spending in the U.S. economy, are finally
slowing their spending as their kids leave the nest and they
begin to feel the sting of ever-rising taxes on them.
Physical Vs. Paper Gold
should buy physical gold as a hedge against inflation and
currency debasement but stay away from the paper gold markets,
says Jeff Sica, founder of Sica Wealth Management with about $1
billion in assets under management based in Morristown, N.J.
They physical market is dictated by supply and demand. The
gold options and futures market, on the other hand, is about
hedge funds playing leverage and momentum, which exacerbates
moves in either direction, said Sica.
"Gold remains vulnerable to the continuation of the asset
rotation into stocks since most managers consider momentum to be
the only rational way to generate returns in a market that is
short on fundamentals," he wrote in an email Monday. "The hedge
funds are in the process of generating liquidity and embracing
momentum. The hedge fund liquidations are not over." he wrote in
an email Monday.
The Fed's comments suggesting more quantitative easing
Wednesday could spark a bounce in gold, which would suck momentum
traders back into the trade, he added. He's purchased physical
gold and hedged the position by buying put options, which rise
when the underlying stock or commodity falls.
Gold Market Action
Spot gold prices fell 1.30% Tuesday to $1,377 an ounce.
SPDR Gold Shares (
), tracking a tenth of an ounce of bullion, lost 1.66% to 132.88.
It traded completely within the prior day's wide trading range,
referred to as an "inside day" for technical analysts, indicating
a lack of direction short-term.
Gold's chart made a "key reversal bar" on Monday and may have
formed a bullish double-bottom pattern with an upside price of
$1630 an ounce, Tom McClellan, founder of "The McClellan Market
Report" wrote in his client note Tuesday.
"For now, we have an oversold condition, a bottom retest, a
key reversal, and a really extreme sentiment condition as shown
by the COT (Commitment of Traders) Report data," he wrote. "These
are the makings of a great bottom."
A correction is healthy and doesn't suggest the end of a bull
run, says Adrian Day, president of Adrian Day Asset Management in
Annapolis, Md. with $125 million in assets under management.
"It should also be noted from a broad view that it is not un
usual for long-term bull markets to experience mid-cycle
corrections," he said in an email. "Gold itself famously fell 43%
in 1975-1976, before rising eightfold in the next four
PowerShares DB US Dollar Index Bullish (
), measuring the greenback against a basket of major foreign
currencies, was nearly flat at 22.79.
Market Vectors Gold Miners ETF (
) lost 2.57% to 27.30.
Silver prices dropped 2.14% to 22.53 an ounce.
Silver Trust (
) skidded 2.96 to 21.62.
Silver Miners ETF (
) gave back 1.64% to 13.28.
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