I’ll cut right to the chase…
Gold is set to drop to $1,550.
The spot price briefly dipped below $1,640 early yesterday, posting new five-week lows. It rallied back above $1,650 by the end of the day — but the damage is done.
After a weaker push last summer that failed to break $1,800, gold has consistently trended lower for more than four months. Yesterday’s brief breakdown is just advance notice that lower prices are in store for gold in the near future…
Looking back over the past two years, you can see how gold has significantly lagged the S&P 500 since mid-2011. Even a brief moment of outperformance early last year was short lived when the spot price failed at $1,800 for the third time in less than 12 months…
Gold just can’t shake this slump. And as $1,650 falls this morning (Gold sits at $1,647 now), $1,550 won’t be far behind.
Now, I’m not some lunatic who doesn’t understand the strong fundamental arguments backing gold. Rampant money printing and overseas demand are the first that come to mind. Both are valid points. But gold’s decade-long bull market has attracted more than a few momentum buyers. And like it or not, these weak hands are adding to the selling pressure.
Here’s what you have to do:
First, don’t get too hung up on the story right now. You can scream about how gold isn’t acting like you think it should until you pass out. But none of your arguments can change the price action.
Next, if you’re a long-term gold buyer, you have to understand just how important the $1,550 range has become over the past two years. This is gold’s price floor. A bounce higher from the $1,550s is the perfect long-term entry point.
However, if we see continued weakness at $1,550, all bets are off…
for The Daily Reckoning
Greg Guenthner, CMT, is the managing editor of The Rude Awakening. Greg is a member of the Market Technicians Association and holds the Chartered Market Technician designation.
Many experts and investors are still secretly dreaming of the eventual return to the gold standard. This will not happen. Why not? The Western leaders will never allow it because China is now the No.1 gold producer in the world. With a return to the gold standard they´d rule the roost and everything else, without even lifting a finger. Gold is intrinsically speaking just as useless as paper, i.e. the stuff we carry in our wallets. If one can safely assume that the gold standard will never return, the gold price will always be kept in check and will be subject to manageable fluctuations caused by speculation and by emotional buying and selling of the uninformed masses pulling hither and thither at the same time.
The world economy is collapsing again, or should I say continuing to collapse? Imports to the US have been declining lately so foreign central banks have less USDs to buy gold with. One of the factors in price inflation (which we all know is a separate issue from money supply inflation) is credit expansion. The Federal Reserve policy has created a situation where the money it creates by buying Federal Treasury Bonds is being held in reserve by the member banks. Meanwhile, consumer credit dries up as interest rates on credit cards remain high and people pay down old balances or default. Unemployment is still high. Another factor is the fact that most other fiat currencies are competing in an insane “currency war” to devalue themselves first. America is obviously not winning this war at the moment as foreigners still reflexively chose to hoard Fed Notes instead of their own national paper. Gold is too expensive for most folks. Is this the “deflation” (relative increase in the value of gold v other commodities) that sometimes happens during hyper-inflation? Only the market is too dumb to see it happening yet?
The Western leaders will never allow it. I don’t think they will be able to maintain this authoritarian position much longer. It might soon be the Chinese who determine what is allowed and what is not, especially if they back their currency with gold.
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