Gold’s historic run-up from $250 to nearly $2,000 an ounce in
the last 10 years has underlined the long-term value and intrinsic worth of a
key asset. It has also provided a fabulous, once-in-a-lifetime investment
opportunity for many individuals, not to mention a long-term momentum trade
for both retail and institutional investors.
Gold has also provided investors with an important lesson
in the past year: despite its distinctive safe haven value, the metal
definitely has a speculative element which is critical to its price
appreciation. In this regard at least, gold is no different than other
assets. Gold’s speculative element was nowhere more evident than in the
series of margin requirement hikes last summer, which saw gold fall from an
all-time high of just under $2,000 an ounce to a low of around $1,550.
From the bottom of the 2008 credit crisis, gold benefited from a
combination of bullish factors. At the bottom of the crisis in late 2008
– and well before the smoke finally cleared from the financial market
in March 2009 – gold got the benefit of relative strength versus the
equity market. Hedge funds and institutional traders are constantly on the
lookout for markets and investment opportunities that are outperforming the
general equities market. Compared to the benchmark S&P 500, gold was a
shining example of relative strength and it quickly caught the eye of big
money traders in the latter part of 2008. Gold was really the ultimate
relative strength play in the early stages of the 2009-2011 global recovery.
Aside from relative strength and valuation considerations, gold also
benefited from successive quantitative easing initiatives undertaken by the
Federal Reserve between 2009 and 2011. The gold market was a huge recipient
of “hot money” inflows owing to the excessive liquidity generated
by QE1 and QE2, and these programs helped propel gold to all-time highs.
Fast forward to the summer of 2012 and we find gold the opposite of
the technical position it was in during the 2009-2011 period. It no longer
had the benefit of relative strength and the residual effects of QE2 have
long since faded. Worse still (from an intermediate-term perspective), gold
doesn’t even have the benefit of the leveraged, speculative traders
prior to the CME Group’s margin hikes last summer. Gold has been forced
to undergo a long period of quiet consolidation as the trend trading crowd
seeks opportunities in other markets.
What will change this situation and generate the return of the
speculative element so critical for gold’s success? One of two
possibilities can be mentioned for the foreseeable interim outlook. The first
possibility is the one being widely discussed by investors today, namely a
third quantitative easing program (QE3). This is the least likely of the
possibilities as far as fueling a near term gold breakout. A third QE program
during an election year would be politically toxic and too controversial to
be considered (barring a massive deterioration in the global economy and
financial market between now and November). Moreover, Fed Chairman Bernanke
isn’t likely to prime the liquidity pump anytime soon given the
relatively high levels of prices for both equities and consumer prices.
The second possibility for a gold turnaround is the one most likely by
year end. A conspicuous increase in gold’s relative strength would do much
to attract the attention of market-moving hedge funds and institutional
investors. This could easily be accomplished even if gold doesn’t break
out from its consolidation pattern anytime soon. Indeed, gold need only
remain within its lateral trading range of the past few months during an
equity market decline after the 4-year cycle peak this fall. This is
essentially what happened in the latter part of 2008, which was the previous
4-year cycle peak. The fourth quarter of 2008 also provided gold with its
opportunity to shine vis-à-vis equities, which could easily be
repeated in Q4 2012.
If history repeats, by this fall gold will be poised to benefit from
both a relative strength increase as well as an historic long-term
“oversold” signal (discussed in previous commentaries, see chart
There are several prominent trouble spots in the global economy which
could easily metastasize and reach crisis proportions by 2013. I’m
referring to the European debt problem, China’s economic slowdown, and
the coming U.S. tax increases of 2013-2014. Gold will once again resume its
traditional safe haven role once the concern over these problems reaches the
boiling point and morphs into full-fledged fear.
The two points along the 60-year economic cycle in which gold
ownership is most desirable is during the peak phase of the cycle when
runaway inflation reaches its apogee, and the trough
of the cycle when extreme deflation is at its worse. We are about to arrive
at the latter end of the cycle when the deflationary undercurrents which have
damaged the economy in recent years will accelerate and become uncontainable.
It’s in just such a ravaging environment that gold will truly shine.
2014: America’s Date With Destiny
Take a journey into the future with me as we
discover what the future may unfold in the fateful period leading up to
– and following – the 120-year cycle bottom in late 2014.
Picking up where I left off in my previous
work, The Stock Market Cycles, I expand on the Kress cycle narrative and
explain how the 120-year Mega cycle influences the market, the economy and
other aspects of American life and culture. My latest book, 2014: America’s
Date With Destiny, examines the most vital issues facing America and the
global economy in the 2-3 years ahead.
The new book explains that the credit crisis
of 2008 was merely the prelude in an intensifying global credit storm. If the
basis for my prediction continue true to form – namely the long-term
Kress cycles – the worst part of the crisis lies ahead in the years
2013-2014. The book is now available
for sale at:
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