Gold Is In A Long-Term Downtrend Driven By Fed Monetary Policy
Summary
* Gold is in a long-term downtrend. By 2020 Gold prices might drop as low as $250.
* Long-Term gold prices are clearly driven by Fed monetary policy.
* In the last 50 years, there have been 3 great Fed policy re-alignments.
* The 4th great Fed policy re-alignment is already here.
Gold has a long way left to fall. If you are long gold in any form, you should sell it.
GOLD IS IN A LONG TERM DOWNTREND DRIVEN BY FED POLICY
Gold just finished the fourth year of what I believe will be a ten year bear market. By the year 2020 or so gold has a very good chance of revisiting its 2001 low of $250 dollars. Over the next twelve months gold might go down to $850 or so, maybe lower. If you still hold physical gold outright, gold ETF's or gold mining stocks take advantage of this rally and sell.
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GOLD IS A CURRENCY
Gold is a currency not a commodity. The long term macro economic trends in gold prices are determined by monetary policy at the US central bank in much the same way as the US dollar. The history of gold over the last 50 years can be described in 3 great trends driven by 3 great changes in fed policy.
The fed kept with an easy money policy from the mid 1960's despite strong signals of declining dollar demand and increasing supply. The Vietnam War, Watergate, rising oil prices and the many Nixon economic missteps such as wage a price controls drove an ever worsening loss of confidence in the dollar. When Nixon abandoned the dollar's link to gold, gold prices exploded for the entire decade rising to $850 per ounce by 1980.
Enter the legendary Paul Volcker. The fed chairman embarked on a very tight monetary policy, 180 degrees the opposite of the previous 15 years, in order to stamp out inflation. Gold prices fell sharply from their highs. The second chart shows that in constant dollars gold prices fell for more than 20 years. Without adjusting prices to constant dollars from 1982 to 1993 gold traded in a range from $250 to $500. From 1993 to 2002 that range was even narrower, $250 to $400.
The great gold rally of the Ought's and indeed the entire commodity super-cycle of that time period can be explained by the third 180 degree monetary policy change at the US Federal Reserve in the last 50 years. By this time Alan Greenspan was the Fed Chair. In 2001 he abruptly reversed monetary policy. The Fed lowered rates from 6.5% to 1.75% in 2001 showing a new, easy money stance. Once again gold prices responded and reversed course. In April of 2001 gold re-tested its 1999 low of $253 and never looked back. The gold rally began in earnest in 2002 when prices crested $300 per ounce. Gold prices rallied for a decade.
In 2009 there was a new Fed chairman. The financial crisis and Great Recession of 2009-2012 was brought on in large part by the bursting of the bubble in global housing markets. Ironically the crisis whose roots lay in a decade of easy money policy at the Fed was met with ultra easy dollar policy as the solution. Trillions were injected into the global economy, the fed dropped rates to zero and embarked upon multiple rounds of quantitative easing. With global markets fearing hyperinflation, a dollar collapse and/or a euro collapse gold prices continued to rally strongly and indeed went parabolic in August and September of 2011.
When it became clear that none of the great fears were going to come to pass: the world was not ending, the dollar was not collapsing, the Euro zone and Euro currency union was not breaking up and hyper inflation was nowhere to be seen gold prices began to ease.
ANOTHER MAJOR FED POLICY CHANGE IS ALREADY HERE
The tapering off and end of all global QE programs over the 2013- 2014 time period is already a de facto tightening of monetary policy. The Fed has telegraphed a rise in interest rates for over 12 months now. They are arguing over when exactly it will happen, but it will happen. The ten year cycle of easy and ultra easy money has ended. The fed chairman and governors will argue over how tight money policy should be, but not over whether or not it should be tighter. The history of gold as shown in the two charts herein shows that we are in an extended bear market for gold. There won't be a Volcker like squeeze on monetary policy. Yellen and the other governors are being ultra cautious. Expect a long, slow careful tightening of monetary policy. Expect a long, slow painful grind lower in gold prices with plenty of countertrend bear traps along the way. Like now for instance.
WHAT ABOUT THE GOLD BUG ARGUMENTS?
[snip]
Gold is a currency. Like the US Dollar its long term price movements are directly correlated to US Federal Reserve monetary policy. There have been three great overarching Fed monetary policy environments in the last 50 years and correspondingly there have been 3 great trends in gold prices. The depth of the great recession has made the Fed ultra careful, but nonetheless a new era of tighter US Fed monetary policy is upon us. Gold at $1200 is well below its high from 4 years ago, but it is still closer to the top than its ultimate bottom. If you are long gold in any form, physical, ETF or equities you should sell them now.
Full article:
http://seekingalpha.com/article/358...downtrend-driven-by-fed-monetary-policy?ifp=0
