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Gold Prices: Why You Shouldn’t Expect $1,000 Gold Anytime Soon
by Louis Basenese, Advisory Panelist
Senior Analyst, The Oxford Club
Wednesday, June 24, 2009: Issue #1025
Since I last suggested gold looked “toppy,” our projected government budget deficit ballooned to $1.75 billion. The Fed decided to print money non-stop to fund a $1.15 trillion asset purchase program. Economic upheaval continued, including several major bankruptcies. Political unrest erupted in Iran. And North Korea stepped up its nuclear defiance.
All should have emboldened gold prices. And yet, the metal struggled to tread water. It’s actually down 2% since February.
Of course, the roar from gold bugs remains uninterrupted. They consider it heresy to suggest commodities correct, especially their supreme yellow leader. But they do. And I’m here to warn you to expect a correction in the short term for gold.
Four Reasons Gold Prices Are Headed for a Correction
Forget $1,000. The price of gold will hit $800 first. And here are the most compelling reasons why…
1. The technical indicators point to a pullback.
On Monday, gold hit its lowest price in five weeks. Ever since hitting $1,033.90 last March, it has struggled to gain momentum. While I’ll concede the long-term trend remains bullish, the short-term charts clearly point to a pullback. Most commodities experts agree that support rests around the $915 level. We’re perilously close now. If we break through that price, look out below.
2. Seasonality – the tendency for prices to strengthen or weaken throughout the year – bodes poorly for gold.
Historically, gold prices weaken the most in June and July. (They tend to spike in late September as demand for jewelry picks up ahead of the October-November festival and wedding season in India.) This week’s sell off could be the beginning of the traditional summer swoon. Now, gold bugs will refute seasonality this go round by asserting we’re not living in “normal” times. Thus, we’re not headed for a “normal” summer. That’s nonsense. The market is littered with poorer souls that invested based on the mantra, “It will be different this time.”
3. The primary catalyst to invest in gold – to hedge against inflation – is lacking.
We’re not anywhere near an inflationary environment. Instead, we’re staring down deflation. Case in point: The latest consumer price index (CPI) and produce price index (PPI) readings came in sharply lower than forecasts. In fact, CPI dropped 1.3% in the last year through May, the largest drop in 59 years. Gold won’t make any meaningful and lasting moves higher until inflation rears its ugly head again. Although inevitable, it could be a year or two before that happens.
4. Speculation and sentiment remain at fever-pitch levels.
Market-leading hedge fund managers remain heavily over-weighted to gold. The taxicab drivers of Wall Street – insurance companies – are even getting into the game. This month, Northwestern Mutual Life Insurance Co. announced a $400 million stake in gold, its first ever in 152 years. In perhaps the biggest sign of a top, though, Germany plans to unveil gold vending machines in airports and train stations. Bottom line, when everyone piles into one side of a trade, we know what happens. The market moves in the opposite direction.
Gold Prices: The Smart Money is Already Bracing for a Pullback
Please realize all we need for a gold price correction to materialize is a slight shift in sentiment… from wildly bullish to positive, not to neutral or negative. And the latest evidence suggests that shift could be upon us.
In the last week, the total volume of U.S. gold futures and options fell 3.6%, according to the U.S. Commodities Futures Trading Commission. Hedge funds and large institutional speculators hit reverse even faster, with “net long” positions dropping 9%.
Of course, retail investors – always late to a reversal – are clueless. The SPDR Gold Shares ETF (NYSE: GLD) – the largest gold-holding trust fund and most common gold investment for us working stiffs – ended last week unchanged, holding 1,132 tonnes.
I urge you not to be as foolish.
Remember, no investment goes straight up and no investment goes straight down. When it comes to gold, sharp and violent corrections are typical. I’m convinced another reversal is afoot.
To profit from it, consider taking a small stake in the PowerShares DB Double Short Gold ETN (NYSE: DZZ). It will provide you with 200% the inverse move in gold prices.
Now, if you’re too chicken to be contrarian, or remain an unrepentant gold bug, that’s fine. Just hold off on adding to your gold stockpiles. A better buying opportunity is coming.
Good investing,
Louis Basenese
- Take Profits on Gold: The Media’s Dead Wrong About This Market
- Put Gold Where Your Mouth Is
- Gold and Oil: Why These Two Commodities Are Set to Blast Higher in 2010
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15 Responses to “Gold Prices: Why You Shouldn’t Expect $1,000 Gold Anytime Soon”
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In addition to being the foremast expert on small-cap stocks, Louis is also well versed in special situations including IPOs, mergers and acquisitions, spinoffs and contrarian investments. His commentary has been featured in several media outlets, including MarketWatch. And he's also a top-rated speaker at financial conferences throughout the country. 
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June 24th, 2009 at 8:10 am
thank you thank you thank you for writing about gold. BUT, inflation is not the main reason for which to own gold. wealth preservation vs fiat currencies is. gold has already breached 915 and now trades at 940.
your quote: Bottom line, when everyone piles into one side of a trade, we know what happens.
now that is laughable, EVERYONE, OMG. because of a few vending machines. i am lmao.
really what kind of drugs are you on or smoking.
i want some so i can live in a delusional world also. forget the facts and just write blithering idiot remarks, most of which are very very short term with no regard for the sept-dec time period.
and i beg to differ, everyone is not bullish gold, in fact most of what i read the authors are very short term negative. but this creates the next buying op which should rally gold prices 25% or more from todays prices. i am short term seasonally on the sideline, and near term bullish. long term, forget about it, the dollar is doomed. BUY GOLD, BUT BETTER YET, BUY SILVER. it will outperform gold.
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Mark Allen Reply:
June 24th, 2009 at 11:46 am
George Bloom…you hit the nail RIGHT on the head.
I find your comments T O T A L L Y right on !!!!
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YaHozna Reply:
June 28th, 2009 at 1:50 pm
Hi George,
You’re simply very right, imo.
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June 24th, 2009 at 9:23 am
“The taxicab drivers of Wall Street – insurance companies – are even getting into the game”
This is a ridiculous statement which, all by itself, discredits what otherwise might have been a credible column.
Balanese should know that insurance companies have professional investment advisors and that Northwestern Mutual, in particular, has long been renowned for its savvy long-term investment approach.
Why take a cheap shot like this? Shame on you.
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June 24th, 2009 at 11:53 am
I understand now why Gold is not already at $2,000.00 an ounce…… Poor analizers are lost when it comes to understanding the real reasons to own metals, both gold AND silver….your comments should be directed to a group who believes our monetary system is A-OK, that we have no issues with fiat paper “money”, and are better off stuffing said Paper under the matress rather than gold/silver…..
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June 24th, 2009 at 12:44 pm
Your defiant obstinacy, obnoxious comments about those who disagree with you, and refusal to admit you have been completely wrong so far are not admirable qualities. Grow up.
You never list the reasons gold doesn’t go up, such as coordinated efforts to hold the price down by every central bank in existence. It requires a “perfect storm” of events to overwhelm this kind of coordinated resistance.
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June 24th, 2009 at 11:38 pm
your comments on gold may or may not be correct. you have a couple of good points. but when it comes to the cpi and inflation. are you deaf and and dumb. have you not been to a gorcery store lately food and energy are not included in the cpi. the government figures on inflaton and unemploynment are a ball face lie. what this country is more govt. lies and deceptiions. when has the government ever told the truth? wake up AMERICA
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June 25th, 2009 at 2:59 am
LOUIS Basenese is right on about the current correction in gold.The Investment U news is one of the most reliable around.Thanks.
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YaHozna Reply:
June 28th, 2009 at 1:56 pm
Hi Wayne,
Well, gold was pretty strong last week … Shares faired even better. It may be that gold will break out the next coming weeks. So many experts are negative on its price while the technical picture looks good and astrological info is even better.
Apart from the superb fundamentals for gold,of course.
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June 28th, 2009 at 9:38 am
The gold price has been doing anything but going “straight up” for 18 months. The chart is either a distribution top during this period or forming a base for a second leg up. The financial condition of the US government (as bankrupt as GM) hardly argues for a distribution top! There may be a short term potential for another 20% drop consistent with the chart pattern but the long term up side is what…100%? 200% Who knows, but it is huge. I thought Investment U advised on investment strategy and not trading.
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June 28th, 2009 at 10:35 am
A book “Gold Warriors”by Sterling Seagrave (at Amazon.com for about $10) tells of US agents recovering about 65,000 metric tons of Japanese looted gold from caves in the Phillipines. This gold just “turned up missing” and sits in various banks around the world. This is about one half of all the known gold in the world (130,000 metric tons). With this huge overhang of gold, no wonder gold doesn’t rise much. Yey gold dealers all pooh-pooh this info. Why???
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June 30th, 2009 at 7:43 pm
Headline of the day regarding Wallstreet disappointment in consumer sentiment. Hahaha. Finally they know that consumers DON’T believe all the market hype. “Thanks for dropping gold and silver prices again!” I’m willing to buy some more at those prices AND I plan to hold too. I’ve decided to copy China’s strategy: exchange my USD for gold and silver. I hope our banks will put in teller windows just to take gold in…
I’m not sure I understand Germany’s gold vending machines… weight/purity/valuation etc… very interesting though.
Can anyone remember when this country did not want any Canadian money? You could hardly exchange it even at the bank. If you had Canadian coins, you tried to use them to pay for your purchases… often the clerk would return the coin and ask for US coins instead… Well… that’s what REALLY COULD HAPPEN to OUR U.S. Money
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July 5th, 2009 at 3:48 am
I agree with you that gold is going to go down to $800, perhaps even lower, maybe into the $700 range again. However, it will not be for the reasons you cite.
Gold and silver are the two most manipulated commodities on the face of the earth. The gold cartel needs lower prices for gold and, therefore, it will act to take down the price. That is what the IMF gold sales are all about.
Do you really think that the IMF needs to sell gold to raise $11 billion in paper money? This, when worldwide, nations have just pledged $1 trillion in paper money to support its programs? Not a chance. The IMF sales will be done in a manner that will do everything possible to crash the gold price, temporarily, and other measures will be taken at the same tiem.
If it were not for the gold cartel, gold would already be selling for $2,500 – $3,000 per ounce, and silver at $35-$40 per ounce, given that we are entering a worldwide economic catastrophe that makes the Great Depression pall by comparison.
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August 20th, 2009 at 4:12 pm
Good day everyone
It is plain to see that there has been a substantial effort to control the worlds economies and that is because there is no real foundation of support for these political entities to build a stable one on. It has been eeroded away as fast as one can build it up.
China has great ambitions to become a leading superpower.
Gold is truly a preciouse metal. It was just as preciouse at $37.00/oz. a few years ago.
No those days of what seemed to be a powerfuly solid financial foundation are truly gone forever.
And anyone putting trust in it will suffer loss.
And for you YaHozna. Those lying astrological entities will not reward you either.
Otherwise how will the prophecy for our days that people will be throwing their money into the streets come to fulfilment. You will see that day soon YaHozna.
Take a look at reality my friends and draw close to your families save what you can and put your trust in the lincoln phrase on the coins.
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October 17th, 2009 at 1:43 pm
Looks like you blew this call pretty good!!
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