Gold plunges again: unleashes perfect storm for the bears
Ben Bernanke’s latest statements on QE hit the gold market hard, driving prices down below the $1300 level in this morning’s trading. There could still be worse to come for the gold bulls!
Author: Lawrence Williams
Posted: Thursday , 20 Jun 2013
SocGen’s analyst Michael Haigh was predicting a fourth quarter gold price average of only $1200 while Nouriel Roubini would have been smiling given his recent prediction that gold would fall back to $1,000. The U.S. dollar surged, seemingly yet another nail in gold’s coffin. All in all something of a perfect storm for gold bears. Could the downturn be turning into a rout?
It hard to tell through all this volatility but some of the attacks on gold are misguided. There appears to be a general belief that gold protects against inflation, thus if inflation is taken out of the equation, gold must fall. But long term research doesn’t necessarily show this to be accurate. Gold does tend to rise on fears of inflation, but some of its best performances in the past have been in recessionary periods – and most notably during the years of the Great Depression of 1929 and thereafter. We’re not saying that we are heading for a repeat of this, but the dangers that we could be falling into another such period are far from over. The U.S. economy in particular is not yet picking up in a manner that suggests the downturn is behind us. Europe remains in a huge financial mess.
Unemployment levels remain horrendous for a nation and economy the size of that of the U.S. and Bernanke latest comments suggest a major U-turn from his original statements that QE would continue until the employment situation improves substantially.
Unemployment is refusing to respond despite the billions of dollars poured into trying to stimulate the economy. Inflation remains low, although probably not as low as official statistics make out. The danger, though of calling an abrupt halt to QE, or even of cutting it back, is that this in itself could tip what is still a fundamentally weak economy into recession and possibly into depression.
And coming back to Europe. If we see U.S. unemployment levels as too high, how about those over here! Spain and Greece are seeing unemployment levels of well over 20% and youth unemployment at a potential revolution-generating level of well over 50%, with no sign of falling back. Portugal is approaching the same levels. Two of Europe’s mega economies, France and Italy, are seeing double digit unemployment and rising, and their youth unemployment levels are 26.5% and 40% respectively – also rising . Even the German economy – the biggest beneficiary of the Eurozone as a weak Euro has kept its export economy very competitive in world markets – is beginning to turn down. None of this suggests anything like an end to the global financial crisis.
Thus, as we suggested in an article yesterday, the downwards movement in the gold price appears to be almost totally fixated on the fortunes of a single economy, that of the U.S., which is perhaps not as robust as its politicians and Central Bankers make out. The economic fortunes of the rest of the world are seemingly being ignored.
What now remains to be seen is whether the Chinese will take up the slack in the gold market yet again, or whether some kind of purchasing fatigue will have set in given the continuing poor performance of precious metals prices. The Chinese economy appears to be faltering too with growth at far lower levels than we have been used to – but growth nonetheless! But the appetite for individuals to buy gold, and find the wherewithal to do so, has so far been undiminished. Will the continuing flow of gold and silver from West to East continue unabated? That is the question facing the gold markets. If the Chinese don’t come in as major purchasers then things could get worse for the gold investor before they get better.
The other factor to watch is whether some of the major short positions in gold and silver on the COMEX now get unwound at the lower prices. If this happens gold and silver could both be set for a major upturn, regardless of China, as the big banks and hedge funds start to look for major profits on the upside.
For the gold bulls though, the worst may well yet not be over. For gold miners, developers and explorers the latest prices are little short of disastrous and we are thus certain to see some further consolidations and terminations. Not a great time for gold followers, but those who truly believe in precious metals are unlikely to be swayed from their course – but may yet face further trials and tribulations before things start to improve. Timing is everything!