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Where is the gold price
today? If you're like many Americans, you have no idea whether it went up,
down, or sideways. Fortunately, I know my readers to be more informed - you
likely know that after falling from almost $1900, gold has been trapped
around $1600 since early May. But you may still be curious why despite
continued money-printing and abysmal US economic reports,
gold hasn't been able to hit new highs.
Here's the truth: gold is
currently priced for collapse. Many investors believe the yellow metal has
topped out and are selling into every rally.
Nerves of Tin
Being a gold investor is
tough business. The last thing any government or corrupt big bank wants is to
have a bunch of people putting their savings into hard assets - and gold is
one of the hardest of all. So we're constantly up against tides of propaganda
saying that gold has no value or is the refuge of doomsayers.
The effect of this is
that even heavy gold investors are always waiting for the other shoe to drop.
When house prices were rising, no one was worried that the market had peaked
or prices were unsustainable. No one was asking whether all the thin-walled McMansions going up would actually be worth anything in a
generation. But for gold, Wall Street has been shorting it all the way up!
Nowhere is this pessimism more evident that in gold
mining stocks. Rising inflation has driven
production costs higher, but the mistaken belief that inflation is contained
and Treasuries are a safer haven is keeping a lid on gold prices. As such,
many of the major producers have missed their earnings projections, and their
share prices have been punished. This has placed a cloud over the entire
sector. In fact, the P/E ratios of major gold miners are near record lows.
Stock prices reflect future earning expectations,
and judging by the low P/Es, Wall Street expects
future earnings to plummet. This likely reflects their bearish outlook for
gold, which is generally viewed as a bubble about to pop.
Chronic Memory Loss
Unfortunately, there is
no public validation for those who have proved the gold doubters wrong. A
couple of years ago, I predicted gold would cross $1500 and even my own staff
thought the call was too risky, too extreme. But I knew then, as I know now,
that at the end of the day the gold price is not a mystery - it's a proxy for
dollar weakness.
Since most investors do
not truly understand gold's economic role, they assume the 10-year bull
market must be a mania. But manias show parabolic growth detached from any
fundamental driver. The definition of a mania is the bidding up of an asset
quickly and beyond all long-term justification.
Gold, however, has grown
steadily in inverse correlation with real interest rates, as explained by
Jeff Clark and Mark Motive in past issues of this
newsletter. As a reminder, here's a
chart detailing the correlation:
 
The Opportunity of the
Decade
After spending the
previous fall and winter testing new nominal highs above $1800, future
investors may come to view spring and summer 2012 as the opportunity of the
decade. Gold has shown its strength and retreated. While most investors will
take that as a signal that the market has topped, some will take advantage of
the general trepidation to add to their positions at hundreds of dollars off
the highs.
While I think gold is a
bargain at $1900 considering today's circumstances, the market phobia of a
price collapse is allowing us to buy at well under established highs. It's as
if you already wanted to go swimming, but you found out when you got there
that the pool was heated.
What Happens Next
I've seen markets like
this before, and by making some reasonable inferences, I have a good picture
of how this could play out. Gold will continue testing the $1600 barrier
until it surprises to the upside. This could be spurred by the announcement
of QE III, a calming of fears in Europe, or any shock to the Treasury market.
Treasuries have temporarily overtaken gold as the primary safe-haven asset.
Once that dynamic is broken, I believe the counterflow
into gold will be tremendous.
Right now, there is a
haze over investors. Frightful news from Europe and a slowdown in Asia have
shaken confidence in any asset that doesn't have the steady track record of
US debt. But as I often remind my clients, past performance doesn't guarantee
future results. Any news that wakes investors up to the coming collapse of
the Treasury market will likely trigger a rush into the one asset with a
track record as long as civilization itself.
Prepare For Collapse
The key to this market is
to understand that a price collapse is coming - but not for gold. Instead,
the market for US dollars and dollar-denominated debt is headed off a cliff,
which will send the price of precious metals soaring.
Now is a time for
uncommon confidence. Everyone knows Treasuries to be safe, just as they knew
house prices would always rise. Then as now, gold's value and utility are doubted.
But my readers know better.
Peter Schiff is CEO
of Euro Pacific
Precious Metals, a
gold and silver dealer selling reputable, well-known bullion coins and bars
at competitive prices.
For the latest gold market news and analysis, sign
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