Concerned at the fall in the gold price?

Concerned at the fall in the gold price

Concerned at the fall in the gold price?

Since September 2012 to date the gold price has gone from 1384 euro all the way down to the sub 1200 euro area now (22cd Feb). Today an ounce of gold costs 1195.44 euro and we’ve seen gold tumble down in roughly 20 euro increments every few months. At the same time the Dow Jones index has rallied since the 15 November 2012 from a low of 12496 to 13946 today – that’s a rise of almost 1500 points or more than 10%.

Accompanying the stock market rise in the last 6 months we seen a rise in bullish sentiment among financial commentators and analysts so along with metals, treasuries have suffered as investors look for ‘risk on’ higher yield investments. This is all predicated on the idea that the US economy is racing out of recession and there are blue skies ahead. However when the herd all rushes to one side of the room a degree of scepticism should be employed. There are some serious problems with the idea of a resurgent US economy unfortunately. One of those factors (which everyone is trying to explain away) is that US GDP actually shrank in Q4 2012 by -0.1% the first time we’ve had negative reading since Q1 2009.

Areas such as housing which have shown resurgent strength are also the areas where the Federal Reserve has been most directly involved – who believes US housing would be showing any pricing strength without the Fed’s QE3 monthly 40 billion dollar purchases of mortgage backed securities? This is a problem, because what happens when the Fed tries to ease back on these purchases? A real free market would continue to drive down real estate prices until they represented outstanding value for investors and this would allow prices to reach a stable equilibrium – but the Feds actions are encouraging the banks to begin writing more mortgages and more business than would be the case in a true free market potentially creating even more problems down the line. Unless of course the Fed is committed to QE forever but that will lead to a crisis in either the currency markets (dollar collapse) or the bond markets (international investors lose confidence in Treasuries). There is no way out of this trap.

If you ignore factors such as negative GDP numbers last quarter or artificially propped up housing market you might well conclude the present stock market rally is built on rock solid foundations but it is worth considering that perhaps the Fed’s money printing has something to do with the run up? Also ask yourself if 14000 dollars (Dow Jones now) today buys you more than 10000 dollars (Dow Jones 2000) in 2000 (the end of the greatest bull market in stocks in history). The answer (no!) tells you that, at best stocks have been trading sideways for 13 years – that looks more like a great bear market a la the 1970’s than the any sort of bull market from history! Based on the current economic fundamentals it seems clear that the half year run up in stocks that we’ve seen since November, is, at the very least, standing on some shaky foundations. That has coincided with a period of weakening metals prices. However the fundamental factors driving gold and silver to outperform stocks and property for the last decade remain very firmly in place. With sentiment so firmly against the metals this is a great time to pick up bargains. Metals may well go lower from here but as soon as sentiment in the stock market is shocked into realising the US economy is still mired in excessive debt with a wobbling currency the markets are likely to reverse in a big way. What will happen to the price of gold and silver then? Draw your own conclusions and base your investment decisions on fundamentals, not on sentiment!

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