Commodities & Metals

The Case for $1,300 or Even $1,200 Gold -- It May Actually Be a Good Thing

Jon C. Ogg

The gold bugs are getting squashed and flushed down the drain as gold continues its slide. After breaking the $1500 mark on Friday there are some key calls to consider as gold could get down to $1400, $1300, or even $1200 per ounce.

The big call earlier last week was from Goldman Sachs Group Inc. (NYSE: GS) saying to get out of gold and to short sell gold. The highly influential trading and investment banking firm predicted that gold would end 2013 at $1450 per ounce and that it could sink to $1270 by the end of 2014. The analyst team that made this call even went on to predict that if these price predictions turn out to be correct that the falling gold prices could even be larger and faster than the firm expects.

Our question on this is the pre-trade timing of this. How much gold was Goldman Sachs selling in the two weeks before they said to short sell gold? The prior week brought about very fishy trading in gold. The rising dollar/yen story played a huge role (see Dollar/Yen parity challenge), but the selling and exits of the SPDR Gold Shares (NYSEMKT: GLD) were uncanny. This ETF is now down to just under $57.2 billion in total assets with 1,158.56 tonnes. To show the exodus, the SPDR Gold shares had assets of $59.43 billion and 1,181.4 tonnes just the day before. That is over $2.2 billion less in raw dollars and close to 22.8 tonnes that were sold out in just one day.

On Friday came another deadly call for gold, with an upside twist. Marc Faber publishes the Gloom, Boom & Doom Report and he appeared on Bloomberg Television’s “Street Smart” segment saying that gold may fall to $1300 before any real rebound. The good news is that he sees that as a great long-term entry point.

Faber said, “I love the fact that gold is finally breaking down. That will offer an excellent buying opportunity. I would just like to make one comment. At the moment, a lot of people are knocking gold down. But if we look at the records, we are now down 21% from the September 2011 high. Apple Inc. (NASDAQ: AAPL) is down 39% from last year’s high. At the same time, the S&P is at about not even up 1% from the peak in October 2007. Over the same period of time, even after today’s correction gold is up 100%. The S&P is up 2% over the March 2000 high. Gold is up 442%. So I am happy we have a sell-off that will lead to a major low. It could be at $1400, it could be today at $1300, but I think that the bull market in gold is not completed.”

Faber also said on Bloomberg Television, “$1300. Nobody knows for sure but I think the fundamentals for gold are still intact. I would like to make one additional comment. Today we have commodities breaking down including gold. At the same time we have bonds rallying very strongly. If you stand aside and you look at these two events, it would suggest that they are strongly deflationary pressures in the system. If that was the case, I wouldn’t buy stocks or sovereign bonds because the stock market would be hit by disappointing profits if there was a deflationary environment.”

One thing that we would note as a final exit to the weekend and week ahead outlook in gold. The recent silly craze we saw in Bitcoin only underpins that there is intrinsic value in gold and silver. We gave a long explanation of this market disparity on Friday. To bid up a virtual currency with no central bank and no hard assets other than a peer-to-peer value system on any given day just sounds silly. That is effectively trying to fix a value of a barter system, and it would seem silly to think that a Bitcoin in cyberspace with no real backing would be preferred over gold or even silver.

We do not really measure gold (nor silver) as a commodity compared to most other commodities. We look at gold as a hard asset that supports the value of currencies. In fact, we just think of gold as a long-term cash alternative but we do not think of it as a short-term cash or money market alternative. Could you imagine if your money market mutual funds or you bank deposits fluctuated up or down 1% or 2% each and every day? This is central bank currency and all of this newly printed money in the U.S., Japan, and elsewhere has to have something ultimately behind it.