It’s been a great six months for gold investors. But is this rally the real deal?
After hitting a low of US$1,045 in December, the precious metal surged roughly 30% to US$1,360 per ounce on the Brexit. Today, with punters starting to take profits, gold is trading slightly lower at US$1,337 per ounce. Reuters reported on the selloff:
‘“In the short term, we can see some more pressure towards $1,300 as the focus is back on the U.S. after strong economic data, which increases the probability of a rate hike before the end of the year,” Commerzbank analyst Carsten Fritsch said.
‘“Investors are taking profits, but $1,300 is now a floor for gold and that is going to hold moving forward,” ING Bank senior strategist Hamza Khan said.’
While gold’s due for a correction, I fear much worse. Contrary to the majority, and despite the recent rally, I expect it to hit US$931 per ounce — a three year forecast — in the months ahead.
History shows that gold should crash
Before I start, I should make something clear. I have nothing to gain by being bearish gold. Let’s face it. I get paid to sell investment newsletters. I could easily bring on a lot of paying subscribers to my premium investment service, Resource Speculator, just by following the crowd and going bullish on gold.
But unlike the majority of investment banks, stock brokers and other newsletter writers around the world, I refuse to be bullish just for the sake of making a sale. In my view, my reputation is worth more than money. That’s why I write straightforward and honest analysis.
Based on multiple fundamental reasons, which I have shared consistently with you, I’m short term bearish and long term bullish on gold. While I have multiple reasons for that point of view, my main argument comes down to one fact. The next financial meltdown.
For years, I’ve explained that Europe’s economy is a basket case. In recent months, the story’s taken a turn for the worse. While I won’t go over old news today, the writing is on the wall for the European banks. When one bank goes under, you should expect a major contagion event across Europe. If history is a good guide, that’s unlikely to spell ‘good news’ for gold — which is an asset, and not money.
Reviewing history, during the US sub-prime credit crisis (GFC), and after rallying initially into the event, gold started to crash during the week of March 17, 2008. Bear Stearns, the 85-year-old investment bank, was bailed out by J.P. Morgan Chase that week.
The meltdown began on the evening of March 13, 2008. The Bear Stern executives made a shocking discovery: the bank was nearly out of cash. Less than a week after trading for US$65 per share, the investment bank had plunged to US$2 per share — the takeover price.
The world spun out of control, and almost overnight…
With fears growing over the global banking sector, it was the collapse of Lehman Brothers — the world’s third largest investment bank — that turned the world upside down on September 14, 2008.
When Lehman went under, global central banks and governments started to panic. While trying to come up with a solution, gold — and gold stocks — plunged to new lows. The precious metal collapsed by roughly 40% from March 17 into October 20. It proved that gold wasn’t a ‘safe haven’ during the times of chaos.
Bank bailouts started to roll out in October, as per the St Louise Federal Reserve records on October 14, 2008:
‘U.S. Treasury Department announces the Troubled Asset Relief Program (TARP) that will purchase capital in financial institutions under the authority of the Emergency Economic Stabilization Act of 2008. The U.S. Treasury will make available $250 billion of capital to U.S. financial institutions. This facility will allow banking organizations to apply for a preferred stock investment by the U.S. Treasury. Nine large financial organizations announce their intention to subscribe to the facility in an aggregate amount of $125 billion.’
As history shows, government and central banks saved the day. Yet, with uncertainty remaining over the ‘new’ solution, punters started piling into gold by October 20, 2008. That sparked a fresh gold bull market into 2012.
A major financial crisis looms
Today, things are a bit different…
When the European banking sector melts down, it will be a disaster. Unfortunately, governments and central banks won’t be able to save the day this time. Global central banks have lost all credibility, and governments are bankrupt.
It gets worse…
If you didn’t know, the European banks own the majority of their continent’s government bonds. For example, Italian banks own the majority of Italy’s government bonds. And according to the European Union and Eurozone rules, Italian banks also own bonds from other European nations — to be ‘politically correct’.
Based on the interconnected web of debt across the continent, when one bank goes under, it will spell a disaster for Europe. When the market starts to smell that something’s seriously wrong with the banking sector, it won’t be good for government bonds. According to Bloomberg,
‘The way Douglas Peebles talks about the $100 trillion global bond market, you’d never guess that bond investors have been on a winning streak. “The market in most countries is completely dysfunctional,” says Peebles, chief investment officer of fixed income at AllianceBernstein.
‘There’s about $10 trillion of negative-yield debt, including the 10-year notes of Germany, Japan, and Switzerland. That means investors want those bonds so much that they’ll pay for the privilege of owning them.
‘Why would anyone put money into a bond with a negative interest rate?‘
I don’t know the answer to Bloomberg’s question. But, the 30-year bond bubble is over.
European sovereign bond bids should start drying up in the months ahead. With fewer buyers and more sellers, bond yields — which move inverse to prices — should start rising. That means it will become more expensive for government to issue new debt, and pay back old debt. In other words, that spells ‘default’. When this happens, traders will think ‘who is next’ and start selling government bonds across the world.
The writing is clearly on the wall…
Unfortunately, governments won’t be able to fund their obligations. If history proves a good guide, global government will either default entirely, extend the maturity dates, or delay the interest payments on their bonds. It means, alongside another banking crisis, a major global sovereign debt crisis should blow up in the months ahead.
Remember, gold — and gold stocks — started to surge higher after a solution was found to the Global Financial Crisis of 2008. The precious metal crashed during the main part of the crisis.
When the next financial meltdown plays out, who will come to the rescue?
This isn’t looking good. In my view, gold stocks should get a lot cheaper in the months ahead. When this happens, while they trade at bargain prices, I plan to recommend the best resource stocks on offer.
In the meantime, I plan to recommend the best speculative resource stocks. These stocks have made my readers huge gains this year. In fact, check out my recent track record. I published this late last week, when I recommended a new speculative stock to my readers that could double their money by September.
Source: Resource Speculator
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Resources Analyst, Money Morning