Gold is the topic that I get the most emails, letters, and phone calls about. Being a gold bug seems to come with an almost religious zeal. People who worship gold are often surprised by my view that gold prices will go down. Still, year after year, the precious yellow metal doesn't do what it's supposed to do. What gives?
Most gold bugs seem to think that everyone will buy gold as the best way to protect themselves from inflation, international crises, currency collapse, and anything else that could bring about the end of the world. The latest global credit crunch could be the final blow to the US dollar. When everyone loses faith in paper money, stocks, bonds, real estate, governments, and central banks, gold will be the last safe place. It would be better to buy it now before the price goes through the roof and an ounce of gold costs thousands of dollars instead of hundreds. The Fed will try to get out of trouble by printing more money. This will cause hyperinflation, which will make Uncle Sam happy because it will cost less to pay off his skyrocketing debt. Only gold, which is limited, will be worth anything. The price will go above and beyond anything we could have thought of because people are scared.
Does this sound familiar? The only problem is that I don't think it's right. You can pay the current price, which is about $660 per ounce, if you want to. But I think you'll be paying three or four times what it's worth.
Don't get me wrong. I've always loved gold. Yes, I can see a day when an ounce of gold will cost a thousand dollars. But not until it drops below $200 an ounce.
In my book and newsletters, I've used charts to show why I'm not optimistic about gold in the short to medium term. Each five-wave move is fixed in three waves. Waves go by their shape, not the time. Since its high of $875 in January 1980, gold has been in a bear market for 27 years, and it's not over yet. The high of $740 in May 2006 was just the end of wave B. Gold can't start a new bull market until wave C is done.
Now, what about the likely economic background for the picture I've painted technically? "How to Profit from the Coming Great Depression" is the title of my book. So, I think that shows where I think the economy will be in the future.
Every time there was a depression in the past, there was DEFLATION, not INFLATION.
(One of my other articles is about this topic.)
Both the details and the basics are in place. Gold does not like deflation. During a time of falling prices, cash is king. So what if the US dollar falls against the euro, the pound, or the yen? Why should that bother you if you get paid in US dollars and spend them? You will only be directly affected if you are using those other currencies. Yes, import prices could go up in the long run. But for a long time, discounts everywhere will more than make up for that, as shop owners try desperately to keep their doors open. Every time a price goes down, your dollar can buy more. Why would you want to put your money in gold, which doesn't pay interest and is losing value?
Don't worry, I'll scream my lungs out when I think it's time to buy gold (well, maybe my keyboard). But now is not that time. I can see gold going below $500 an ounce even in the near future. And yes, the US dollar should go up at the same time.
Also, don't forget that I was yelling in 2001 that you should buy gold when everyone and their dog had given up on it. The price of an ounce of gold went from just over $250 to almost $750. I don't always think gold will go down. Just like any other investment, there are good times to buy and bad times to sell. I don't think you should buy it right now.
