I am always amazed at the extreme ranges predicted for precious metals and the prevalence of articles and interviews supporting positions in the direction of the most recent market action. As gold soared to most recent peaks in April and September of this year, everything was hyperinflation-gold to $3000, $5000, $8000, $12,000. During the recent sell-off which saw gold drop to the low $1500s from $1900, the theme was that the gold bull market was over, deflation was going to rule the day and that $100 was near at hand.
Hello? State Farm, Progressive, AllState-I’d like to buy some homeowner’s insurance.
The odds of your house burning down are pretty small. It happens to just .08 percent of U.S. citizens
Read more: http://wiki.answers.com/Q/What_is_the_average_chance_of_a_house_fire#ixzz1j91UZ7uB
Realistically, your odds of your house burning down really make the choice to carry fire insurance pretty silly. You don’t need it-oh sure, the mortgage company makes you carry it to protect their investment-but really, you just buy it when you need it-save yourself tons of premium expense-still covered for next to nothing. What? You don’t know when the fire might happen and when it does you won’t be able to get coverage? Rats-there’s always a catch! No insurance-no protection.
We’ll talk about the case for $10, 000 gold in future writings but right now let’s see how we make a case for $1100 gold. The simplest explanation is illustrated by means of some simple ratios-We had a bottom in gold in 2001 thanks to the financial wizardry of then Chancellor of the Exchequer, Gordon Brown, who sold half of Britain’s stash, pre-announced, into the market, of $252 which ran upward for 10 straight years to the high $1900s in 2011.
A range from the bottom to $1973 is just north of $1700 so a 50% pullback would be the high minus half the increase of $1752 ($876) or $1097. Granted, this would take place over about the same time frame as the gain so it would take a few years.
The GLD was initiated in late 2004 and a chart with Fibonacci ratios confirms this hypothesis if we do indeed get this long-term pullback.
The GLD is generally 2% or so below the spot price due to fees, etc. for “managing” the ETF and represent one-tenth of an ounce of gold.
The $Gold (the spot price) weekly chart shows that our 200 week average price is $1180. See red average on the left portion of the chart and the red trendline. This from Stockcharts.com
Anything can happen in the Market-Mark Douglass
Could this happen to gold? In this market environment? Well, yes it could.
The GLD on weekly chart…extreme up and downs-last drop from $1970 area to touching the low $1500s was almost 25%. Even after a bounce, another 25% drop from here puts in the $1200. Again, note the 200 week MA supporting $1100 thesis.
Robert Prechter and many of the people predicting that these events are going to happen, that deflation is the biggest risk and the most likely event, are telling us to be out of all markets and in cash, especially Treasury Bills. There are as many forecasts showing test of the 2009 stock markets bottoms, and if broken, projections of 450 S&P levels.
Supporting evidence: All the governments around the world are insolvent. All the banking and financial institutions have their solvency based on the value of the assets they own holding their value, the major banks of Europe and the US are owners of the sovereign debt that cannot be repaid, that cannot have the rising interest costs on the rising debt levels payable on a sustained basis.
If we get a major contraction, cash will indeed be king. Liquidity will be the most valuable characteristic of any asset.
Scared to own precious metals at these levels because of these potential events? Well, sure. But if your assets were held at Lehman Brothers, or in recent months, MF Global even if you were right, you still had/have nothing.
So you might buy gold, have it drop to $1100 but if it is the real thing and you have it in your possession, you still have your purchasing power and every other desirable asset will be cheaper as well. The financial house of the entire world is at risk at bursting into flames and very, very few have any coverage. AIG, Countrywide, Merrill Lynch, Bear Stearns, General Motors, Wachovia
Or you could protect yourself by owning precious metals. Safety in inflation or deflation. Oh by the way, the weekly chart shows a gigantic flag with probability of a breakout to the upside, which will be the theme of the next letter.