2 More Reasons the Gold Trade Is Dead

Yesterday's stock market drop was a healthy reminder that stocks do, on occasion, go down. This morning U.S. stocks opened higher, with the S&P 500 (SNPINDEX: ^GSPC  ) and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) up 0.51% and 0.35%, respectively, at 10:15 a.m. EDT.

Gold: It's game over
For gold bugs, gold's sharp decline this year has been a bit confounding. Not for long, however, as they can always reach up their sleeve and pull out a trump card: The decline is a result of coordinated central-bank action to suppress the price of gold! This is a perfect example of pseudoscientific analysis. When gold prices are rising, the data confirms your bullish thesis for the precious metal. When gold prices are falling, you reject the data as unrepresentative -- it has been corrupted (and, by the way, the reason for which the data is corrupted is unverifiable). In other words, there is no way to falsify a bullish thesis on gold; that's the way pseudoscience operates.

In fact, one does not need to dig all that far to find accumulating evidence that undermines some of the bullish arguments for gold.

First, inflation, or even expectations of inflation, are nowhere to be found. For example, take the breakeven inflation rate, which is an indicator of expected inflation equal to the nominal yield on same-maturity Treasury bonds minus the real yield on same-maturity Treasury Inflation-Protected Securities. The breakeven inflation rate with a 10-year horizon has dropped to 2.24% from a high of 2.6% in March. That's not exactly Weimar.

Inflation's no-show is related to a second, more fundamental point. As macro-trader and blogger Mark Dow recently argued, "there is zero correlation between the Fed [money] printing and the money supply." The money base (i.e., liquidity) has grown dramatically as a result of quantitative easing, but it is banks and shadow banks that create credit. I urge you to read Dow's piece in order to understand the distinction. The fact is that we have not witnessed an uncontrolled explosion in credit due to the Fed's extraordinary policy. (Yes, I'm aware that specific parts of the credit markets are frothy -- ahem, junk bonds -- but I'm talking here at an aggregate level.)

Shareholders of the SPDR Gold Shares (NYSEMKT: GLD  ) and the iShares Silver Trust (NYSEMKT: SLV  ) need to carefully consider the hypothesis that the gold trade is dead (the silver trade is based on the same dynamics). I believe it, and so does Mike Novogratz, the co-chief investment officer of the Fortress Macro and Drawbridge Global Macro funds, who told CNBC on Wednesday:

I personally think gold is toast. ... We peaked out at $1,900 two years ago. If you've run the gold chart over the Nasdaq chart over the Nikkei chart in 1989, they're identical. Once bubbles pop they go all the way down. ... Gold was a classic bubble. ... The gold ETF volume just kept picking up, and now it's on the reverse; it wouldn't shock me to see gold back at $500.


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  • Report this Comment On May 17, 2013, at 10:50 AM, Mombasa69 wrote:

    Gold Game over? Are you kidding?

    Stock Markets around the world are in another huge bubble, it's insane, I'm old enough to know a bubble when I see one, Gold is a safe haven, and when I have some more cash I'll buy some more while the prices are low.

    QE Insanity is the only thing propping up this house of cards, and when these bubbles pop it isn't going to be pretty.

    Isn't it odd that Stocks are going up when economies are drowning in debt and unemployment remains stubbornly high?

    The Stock Markets are now totally disconnected from reality, all bubbles burst the next one will be the mother of all crashes.

    I'll be laughing with my real assets in Gold and Property.

  • Report this Comment On May 17, 2013, at 10:58 AM, dstb wrote:

    The short term trade may be over for now but the long term thesis is very much intact. No fiscal restraint combined with endless money printing will continue to push gold prices upward. Inflation is largely irrelevant for now. Most important is that the dollar will not stay strong forever as it goes through the stages of losing its world reserve status. As the dollar falls gold will rise. Owning gold is really just a hedge on the falling dollar. Forget trading it. Just own it.

  • Report this Comment On May 17, 2013, at 11:04 AM, aqua97 wrote:

    I remember the video which led me to this site the first time: It was about the "USA dollar will soon collapse" ('conspiracy theory' as my friends call it), and the narrator said he is "buying silver like crazy", to be sure not to lose his money when 'paper money' will worth nothing.

    How is it possible that opposite points of view coexist on same site? :) , was it a blogger/advertiser that published the presentation?

  • Report this Comment On May 17, 2013, at 11:27 AM, duuude1 wrote:

    Mombasa, the gold game really is over. No kidding. If you bought anywhere in the last couple of years, you really no kidding want to sell and get out before you get hurt. Or if you bought a decade ago, you want to preserve the lucky wealth you now have.

    This is one of those things where it doesn't matter if you think your logic or rationale or anger is right - you can be right but very poor. Sometimes it makes sense to be wrong but save your wealth. Which is more important?

    You even make the point that "Stocks are going up when economies are drowning in debt and unemployment remains stubbornly high" - meaning that the price of something doesn't always follow logic. Well Mombasa, same with gold. It can go up far in excess of rational valuation, and can go down far below what some might consider rational valuation.

    In this case what is probably going to happen is that gold will go down to somewhere in the neighborhood of $300-500 and then bump along at that level for a couple decades until the next mega-generational crisis. For a copy of that script, take a look at gold prices from 1980-2010.

    You could very well be right about many or all of your criticisms about Fed actions or market levels. I happen to believe you are wrong. Heck we could both be wrong. But one thing is crystal clear from a look at the history of all the asset classes over history - which includes all the stupidities and boneheaded moves and calamities from world wars to depressions to oil shocks - and that is that stocks by far outperformed all other asset classes over the long term. Buy and hold diversified stocks - and forget about gold.

    Good luck.


  • Report this Comment On May 17, 2013, at 11:39 AM, fiatdream wrote:

    The CPI index (Used for TIPS) the author is quoting doesn't include food or energy costs. Just because you say there isn't inflation doesn't mean it isn't happening. GLD, SLV and the COMEX are going to face some serious problems as the physical metal gets pulled out of the markets. Sure investors are selling off the ETFS and the futures but they are buying and holding physical. This is a healthy correction in a bull market of metals. Is there any country in the G-20 that has a balanced budget? Have we accumulated more debt in the past year? is anything actually fixed since 2001? Don't discount the fact that over 3 billion people in the world view gold and silver as money, and they are buying it as fast as they can. The wealth flows where the gold goes. This is history, and it has a 100% successful track record. I would sell GLD and SLV and buy mining companies. The miners will benefit from the physical demand where the ETF's will not.

  • Report this Comment On May 17, 2013, at 1:30 PM, TMFAleph1 wrote:

    <<The CPI index (Used for TIPS) the author is quoting doesn't include food or energy costs.>>

    This is a tired fallacy that goldbugs constantly trot out. Like a whack-a-mole, no matter how many times you rebut them, another one comes along and says the same thing.

    Let it be known once and for all: Treasury Inflation-Protected Securities (TIPS) returns are indexed on the All-Items CPI-U, which *does* include food and energy costs.

  • Report this Comment On May 17, 2013, at 2:33 PM, rhealth wrote:

    Then bet against it. Put your money where your mouth is. Don't come crying to me though when you are proven dead wrong once this cyclical dip completes.

  • Report this Comment On May 17, 2013, at 3:19 PM, msiwantitall wrote:

    Sorry, the following two statements don't jive:

    1. The central banks bought more gold in Q4 than ever (fact).

    (why is it so outlandish to consider a coordinated effort by the central banks to suppress the price of gold if they are so interested in buying?)

    2. Gold is dead.

  • Report this Comment On May 17, 2013, at 4:07 PM, TMFAleph1 wrote:


    Speaking of two things that don't jive: Central banks can't be suppressing the price of gold while simultaneously buying more of the yellow metal than ever. Even though you may want it all, you can't have it both ways.

  • Report this Comment On May 17, 2013, at 4:43 PM, awallejr wrote:

    Let's get the goldbugs angry. I am no goldbug. I believe in owning gold as a small percentage of one's assets basically for what I consider as "insurance." So when the price of that insurance comes down it actually makes me happy.

    I suggest old coins since you get numismatic value along with melt value.

  • Report this Comment On May 17, 2013, at 4:44 PM, msiwantitall wrote:


    Two facts:

    1. Central banks are buying gold.

    2. Price of gold is going down.

    If stocks can be manipulated, why can't gold?

    BTW, I DO have it all...

  • Report this Comment On May 18, 2013, at 1:24 AM, herky46q wrote:

    I look forward to gold prices at $500. Love a good discount.

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