Gold Won't Break $2,000 Before 2020

Yet another failed attempt. Stocks rose today, but the S&P 500 (SNPINDEX: ^GSPC  ) failed once more to break its October 2007 all-time (nominal) high of 1,565.15. Incredibly, this marks the fourth day running that the index has closed within 1% of this level. Meanwhile, its narrower, price-weighted cousin, the Dow Jones Industrial Average (DJINDICES: ^DJI  ) , has now risen every day in March, for a nine-day winning streak. This is the longest streak since November 1996! In the process, it has managed to set seven consecutive record highs. For my take on the possible interpretation of these streaks, let me refer you to my column from Monday.

Consistent with rising stock prices, the VIX (VOLATILITYINDICES: ^VIX  ) , Wall Street's fear gauge, declined 3.6% today, to close below 11.56. (The VIX is calculated from S&P 500 option prices and reflects investor expectations for stock market volatility over the coming 20 days.)

Gold loses its luster
Which is the worst-performing asset class this year? (Hint: It's the only one that has ornamental value.) Still can't find it? In that case, check out the following chart, courtesy of JPMorgan Chase:

It's been roughly 18 months since gold set its (nominal) all-time high of $1,920 per ounce in September 2011. Since then, it's been a difficult ride for gold, as macroeconomic fears have subsided (albeit in fits and starts) and the inflation bogeyman has yet to show its face. The result: Gold has lost nearly a fifth of its value in dollar terms -- or, rather, the dollar has appreciated by a fifth in terms of gold, to satisfy strict gold-bug nomenclature.

I'm ready to make a long-range prediction regarding gold: Its price will not exceed $2,000 this side of the 2010s. This is not simply a case of kicking an asset when it's down -- I've been ruminating this thought for some time, but this is the first time I'm publishing the call. I justify it on three main axes:

  • The base case for inflation in the U.S. and other advanced economies is muted to mildly above-average inflation -- not debilitating inflation, let alone hyperinflation.

  • The fiscal situation of the United States is currently less serious than gold bugs are willing to believe. It's true the current path is unsustainable over the long term, but it is also true that this path can be redressed. The base case is that this will occur, with some painful, but tolerable, adjustments.

  • The base case for the European sovereign debt crisis is a muddle-through.

Another scenario is certainly imaginable, but I am reasoning here on base-case probabilities, and I am quite comfortable with my prediction. Shareholders in the SPDR Gold Shares (NYSEMKT: GLD  ) and the iShares Silver Trust (NYSEMKT: SLV  ) would do well to establish (if they have not already done so) and continually revisit their base-case scenario.

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Read/Post Comments (17) | Recommend This Article (6)

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  • Report this Comment On March 13, 2013, at 7:31 PM, SN3165 wrote:

    You're prediction is going to be very, very wrong.

  • Report this Comment On March 13, 2013, at 7:31 PM, SN3165 wrote:

    *Your

  • Report this Comment On March 13, 2013, at 7:36 PM, TMFAleph1 wrote:

    We're unlikely to find out anytime soon...

  • Report this Comment On March 13, 2013, at 8:54 PM, luckyagain wrote:

    Gold is like anything else that people buy or sell; sometimes it goes up and sometimes it goes down. Gold companies are in the business of selling gold and gold bugs are always in the business of buying it. I would suggest that gold be treated like any other investment. Sometimes it is a good time to buy and sometimes it is good time to sell.

  • Report this Comment On March 14, 2013, at 10:56 AM, Louebsch wrote:

    I would say gold is more of an insurance policy than an investment. You buy physical gold in case something terrible happens to you or your family. When it goes down, buy more. Gold is not something to be compared to other stocks because it is not a stock. If you want an investment buy stocks. You buy gold to put your nest egg in because it will keep up with inflation and has no risk of reaching zero. If you keep your nest egg in the dollar on the other hand, it inflates every year so you will lose 2-10% of the value (Depending on whose stats you believe) every year guaranteed.

    Also, I don't know why this doesn't get through to more people but the whole, "Ornamental Value" argument makes you look stupid. Gold is an ideal metal for manufacutring. It is easily malleable and doesn't rust, plus its a good conductor. The only reason cars aren't made of gold is because it costs $1500 an ounce!

    I will also make a prediction, gold won't go below $900 dollars ever again!

  • Report this Comment On March 14, 2013, at 12:39 PM, wengem wrote:

    Your 2020 prediction is based on:

    1) Inflation isn't that bad right now

    2) The debt situation is fixable

    3) Europe is muddling through it's crisis.

    Do you really think that those three indicators are strong enough to make a call for 7 years into the future? (and that's assuming that your analysis of those indicators is correct to begin with!!!)

    Think back to 2006. No bank failures, no bailouts, no QE infinity and real estate up 15% every year.

    7 years before that, an unforeseen tech bubble was inflating and I had never heard of Osama bin Laden.

    I'd say things change a heck of a lot in 7 years for you to be making bold predictions with weak indicators.

  • Report this Comment On March 14, 2013, at 3:58 PM, ozzie wrote:

    I'd have to say one of 2 things must be true, based on recent Fed Policy. Either Interest rates skyrocket (to at least double-digits for the 10-year) or Gold breaks $2000 or even $3000 as the Fed tries desperately to keep interest rates lower. Remember, that interest rates are pretty much all the Fed has to control inflation. So either inflation goes crazy (and with it, Gold prices) or interest rates do. I don't see a 3rd alternative or even a compromise at this point.

  • Report this Comment On March 14, 2013, at 5:18 PM, TMFAleph1 wrote:

    "The only reason cars aren't made of gold is because it costs $1500 an ounce!"

    That is certainly untrue!

  • Report this Comment On March 14, 2013, at 5:41 PM, TMFAleph1 wrote:

    "I'd say things change a heck of a lot in 7 years for you to be making bold predictions with weak indicators."

    Things can change a heck of a lot in 7 years, but one thing that *doesn't* change is mean reversion.

  • Report this Comment On March 15, 2013, at 5:17 PM, drax009 wrote:

    The dollar may cease to exist in 2020 so in such case, you may actually be spot on.

  • Report this Comment On March 19, 2013, at 11:09 AM, TMFAleph1 wrote:

    The dollar may cease to exist in 2020 if there is a nuclear war or a meteor destroys the earth.

  • Report this Comment On March 19, 2013, at 12:48 PM, wengem wrote:

    TMFAleph1: nice quip, but I'm curious why you think gold has to follow 'mean reversion.' And if it does, then which mean is going to revert to? The 1975-2002 mean of about $350? The 2002-present mean (which is more of a trajectory that goes to the moon) or something else?

    And funny enough, if you had said the same "revert to the means" quip 7 years ago about gold, you would have been quite a bit off the mark.

  • Report this Comment On March 19, 2013, at 3:56 PM, whereaminow wrote:

    Up $60 since this article.

    Alex, you continue to be the best contrarian indicator for gold bulls.

    Thanks,

    David in Liberty

  • Report this Comment On March 19, 2013, at 4:26 PM, TMFAleph1 wrote:

    The mean inflation-adjusted price from 1971 through the present is a good benchmark.

  • Report this Comment On March 22, 2013, at 5:24 AM, whereaminow wrote:

    Alex,

    I've tried to explain this to you before, but it's not sinking in. Your understanding of reversion to the mean is incorrect.

    Reversion applies to two things that have a fixed relationship with each other. A coin flip will revert to the mean because the weight of heads and tails sides remain unchanged. A baseball player will revert to his mean home run ability because his actual ability to hit for power has not changed.

    There is no such relationship between the value of the dollar and the weight of gold. There is no mean to revert to. The value of the dollar is dependent on many factors that change over time. Same for the value of gold.

    I'm not quite sure why this is so difficult to understand.

    David in Liberty

  • Report this Comment On April 15, 2013, at 4:39 PM, TMFAleph1 wrote:

    Gold is down over $190 (a greater than 12% loss) from the publication date of this article, a little over a month ago. It was never up $60 from the starting price during this period.

  • Report this Comment On April 16, 2013, at 3:46 PM, whereaminow wrote:

    Was it because of reversion to the mean?

    LOL

    David in Liberty

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