Why Gold Will Crash to US$931 Per Ounce

Financial markets are rattled.

Investors, traders and central bankers are confused.

Even billionaire investor Mark Cuban is confused. He told CNBC,

I think people are so confused about this market. Nobody really understands what’s happening, including me. So, things that I thought made sense didn’t make sense and weren’t working. … When traders don’t know what to do, they go where everybody is. And I thought that would be gold.’

Indeed, gold’s had a great month. The precious metal has surged from US$1,173 to a high of US$1,263 per ounce.

Unfortunately, the rally won’t last. It’s a massive short squeeze. So, expect gold — and gold stocks — to collapse in the months ahead.

I’ll explain…

Beware of major short squeeze

To start with, I’ll explain how shorting works. Short sellers bet that prices will fall. In this case, they borrowed gold (and gold shares) from their brokers and sold it onto the market. To close their positions, they ‘bought’ back their gold (and gold shares) — on the market — and returned it to their brokers.

On this note, mining.com reported that ‘Net short positioning — bets that gold could be bought back at a lower price in the future — hit a record during the final trading week of 2015.’ At the time, gold was trading under US$1,100 per ounce. The majority thought a collapse below US$1,000 per ounce was inevitable.

But the world changed. The Japanese moved to a negative interest rate policy, US unemployment weakened, global stock markets collapsed and the US Fed became more dovish. Gold thrived in the uncertain environment.

Punters attitudes have positively changed towards gold. According to countingpips.com, ‘Gold speculator and large futures traders sharply added to their gold bullish positions higher last week for a fourth consecutive week and brought bullish positions to the highest level since October.

The sentiment change — made possible by the massive short covering rally — is shown on the chart below. Check out the recent green spike. It shows the ‘net long speculative positions’.

Click to enlarge

Punters are confident gold’s rally will continue. The rumours of sub-US$1,000 gold are gone!

The mainstream’s always late to the story

Meanwhile, Aussie dollar gold price is trading at near four year highs. It’s been an outstanding rally. But let’s not forget, the precious metal is still currency adjusted. At the end of the day, the US dollar gold price is driving the show. If the US dollar gold price collapses, Aussie dollar gold — and gold shares — will likely be in a world of pain.

In my view, the writing’s still on the wall for gold. The current gold rally is missing something. That is, there wasn’t massive accumulation.

This rally was on little volume — it was short and sharp. Normally, it takes time to accumulate a decent positon — not 20 days. Major accumulation generally happens during price pullbacks — not when prices surge. Smart investors don’t chase prices higher.

In this case, the rally’s a deceptive one. It’s just another bear market, short covering rally. Remember, the US dollar gold price has collapsed for five years straight. So, I wouldn’t back up the truck and buy gold stocks right now.

Of course, if you read the mainstream financial press, you’d be swayed to the bullish side. Being conservative and fence sitters, they’re always late to the party. They’ll only jump on the story after the markets have made a big move. For example, CBC News reported last week,

Bad news for stock markets is often a good time for one of the world’s oldest commodities, and this year is no exception as gold has rallied almost 20 per cent since the start of 2016.

The price of an ounce of gold bullion has risen from a little over $1,000 US an ounce in late December to above $1,200 US Thursday, through a period when every single major stock index has fallen.

That’s part of a widespread flight to safety that has seen investors dump anything perceived as risky — stocks, oil and currencies like the Canadian dollar — and put their money into investments that are perceived to be safer.

That’s leading them right to gold, which is gaining ground after a multi-year slide.

“Investors are suddenly waking up to the risks in the market, pretty much like what happened in 2008,” said Robert Cohen, a portfolio manager at Scotiabank’s Dynamic Funds.

I’d like to thank Robert Cohan for mentioning 2008. Remember, gold fell WITH stocks during the Global Financial Crisis. Unfortunately, many choose to ignore this fact. They assume this time is different.

But, why is this time different?

Many argue that global debt’s skyrocketed, banks are too big to fail, the notional value of derivatives has exploded, and companies are overleveraged. But, one fact remains: gold is still an asset — it’s not cash. You can’t use gold to buy milk.

Gold’s an asset…just like equities, commodities, and property. There’s no difference. When financial markets start to blow up next time, gold could easily crash. If you think otherwise, frankly you’re too emotional. And emotional investors often lose money.

During the financial meltdown of 2008/09, gold bugs proclaimed the next great depression had arrived. Lehman Brothers — the world’s third largest investment bank at the time — went under. A countless number of banks followed suit. It was a scary time.

Fortunately, there was no great depression. Central banks started printing money and pumping banks with liquidity. To do the job, they bought government bonds. Unfortunately, this has unleashed a massive bond bubble.

As it stands, the world is facing a major sovereign debt crisis. Business Insider reports,

The market for negative-yielding bonds is now worth around $6 trillion, and has doubled in just over a month, showing just how worried how investors across the globe are about the state of the world’s economy.

According to data from JP Morgan, over 25% of all sovereign debt tracked by its GBI Broad Index, an index of 27 major issuers, is now in negative territory.

Trillions of government bonds boast negative yields. This means you have to pay the government to hold your money.

The bond bubble is staring everyone straight in the face. And many believe the government couldn’t possibly default on their bonds. Yet, history shows that no government has ever — just once — paid back their debt. History shows they’ve either defaulted entirely, suspended interest payments or changed the maturity dates.

This is the REAL looming financial crisis. It should start with another global banking collapse in the months ahead. European banks are faring the worst. In my view, Deutsche Bank — Europe’s largest bank — will likely go bankrupt. Businessfinancenews reported,

‘Deutsche bank has 350 million euros due to be paid by April. Last month, the financial institution reported a full-year loss of 6.8 billion euros and 2.1 billion for fourth quarter fiscal year 2015 (4QFY15). This week, however, Mr. Cryan optimistically referred to the position of the bank as “rock solid.”’

Right. Dick Fuld, Lehman Brother’s CEO, also reassured everything was OK.

When the banking collapse kicks off, why should gold skyrocket? Remember, it didn’t rally during the Financial Meltdown of 2008/09. When punters panic, history shows punters sell ALL assets (i.e. gold, stocks, property, and commodities). The Federal Reserve has nothing to do with it.

Adding it up, while another sharp bounce is possible, expect US$931 per ounce in the months ahead. Of course, gold could crash even lower. Aussie dollar gold — a currency adjusted version — won’t survive when this happens. Remember, this is just the initial reaction. Later, when punters figure out what’s wrong, gold should surge. But, I’ll discuss this how this works to Resource Speculator readers.

For months, I’ve been preparing Resource Speculator readers for the sovereign debt crisis. It’s not time to buy gold shares. That time will come. I’ll provide more details to readers this week. If you want to know more on this story, click here.


Jason Stevenson,

Resources Analyst, Money Morning

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

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