Gold is sought after and saved when its price is rising in anticipation of rising inflation or on concerns created by the collapse of currencies. In the final stage of long bull markets in any asset, however, prices often continue to rise further for no other reason than that they have been rising so dramatically for so long making investors confident they can extend expectations for more gains in a straight line into the future, rather than thinking cycles. [That begs the question no gold bug wants to contemplate “Could gold’s long bull run be over?” Let’s try and answer that question.] Words: 814; Charts: 3
So writes Sy Harding (www.StreetSmartReport.com) in edited excerpts from his original article* entitled Here’s Why Gold’s Long Bull Run Could Be Over.
Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!), may have further edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) the article below for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.
Harding goes on to say, in part:
Given that it’s been 12 years and the expected inflation has not shown up, and indications that the dollar’s multi-year plunge may have bottomed in 2008, [I contend that] gold may well be in that final stage where its fundamental supports are no longer there and its price is being maintained by speculative investors. [Let me explain why such a conclusion makes sense. Also read: Is Gold’s 13 Year Run Almost Over?]
Where’s the Expected Inflation?
2002 to 2005
Historically gold has been seen as a safe haven in times of rising inflation. No surprise then that it’s been in a long and impressive bull market since 2002, when:
- the 2001 recession resulted in significant monetary easing by the Fed in an effort to re-stimulate the economy,
- the 9/11/01 terrorist attacks resulted in dramatic increases in government spending on Homeland Security and
- the subsequent invasions of Afghanistan and Iraq began…
2005 to 2008
The inflationary expectations continued when:
- previous federal budget surpluses turned to growing deficits as the wars were ramped up while revenues from taxes fell as the economy continued to struggle.
Inflation had still not shown up to any degree but it seemed sure to do so at any time. So gold continued to attract unusual buying. By 2008 its price had doubled again to $1,000 an ounce.
2008 to 2011
The financial crisis hit in 2008 when:
- government deficit spending increased again as massive stimulus efforts were undertaken to prevent the subsequent recession from worsening into the next Great Depression.
Gold almost doubled again, reaching $1,900 an ounce last year but still the soaring inflation expected for a dozen years has not arrived, at least in the U.S.
Inflation from 1990 to 2012
During the decade of the 1990’s, inflation as measured by the Consumer Price Index averaged 2.8% annually. In the dozen years since 2001 it has averaged 2.5% annually. Over the past year is has averaged only 1.8%.
The Inflation of the 1970s
The last time gold enjoyed a huge bull market was in the 1970’s when inflation was truly spiraling higher in a struggling economy. Gold surged to a then record ‘bubble’ peak of $850 in 1979 but inflation averaged 7.7% annually in the 1970’s decade, and reached a high of 13.6% in 1981.
U.S. Dollar Weakness
Gold is also considered a hedge against declines in the value of currencies, particularly the U.S. dollar so the dollar’s plunge beginning in 2002 was also supportive of gold’s long bull market. The U.S. dollar peaked in 2002 at 120. By 2008 it had plunged to 71.
…[G]old…is sought after and saved when its price is rising in anticipation of rising inflation, or on concerns created by the collapse of currencies. [I]n the final stage of long bull markets in any asset, [however,] prices often continue to rise further for no other reason than that they have been rising so dramatically for so long. [That] makes investors confident they can extend expectations for more gains in a straight line into the future, rather than thinking cycles [and, as such, that is nothing more than speculation].
Given that it’s been 12 years and the expected inflation has not shown up, and indications that the dollar’s multi-year plunge may have bottomed in 2008, gold may well be in that final stage where its fundamental supports are no longer there and its price is being maintained by speculative investors.
Weakness in Gold Mining Stocks
Another warning may be coming from the gold-mining stocks. Gold bullion is only down $200 an ounce, 10%, since its peak at $1,900 an ounce last year. However, gold-mining stocks, which often lead the bullion in both directions, began their long bull market in 2001, a year before the bull market in bullion began, and potentially topped out in March of last year, having plunged 29% since. [Also read: Is Current Performance Stench of GDX About to Turn Into That of Perfume?]
Our technical indicators have been on a sell signal on gold since October, with a downside target of $1,670 an ounce, the level of its important 30-week moving average [Read: Update: Gold & Silver to Drop to $1,675 & $30.50 by End of 2012 Before Going to $3,950 & $117 by End of 2013!]. If it finds support there we could get another buy signal for another rally but if that support does not hold, it could be ominous for gold, given that two main reasons for its long bull market (the threat of inflation, and the plunging dollar) may no longer be there, leaving its main support over the last year or so as mostly speculative fever, and even it may be waning given the $200 an ounce decline from its peak at $1,900. Something to think about before jumping more aggressively into gold on the belief that this dip too is just another buying opportunity.
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