Gold prices will sink, but just enough to shake off its skeptics
Listen up, dear reader鈥�.herein we announce an historic Daily Reckoning forecast.
Here鈥檚 your north star鈥our compass鈥�.your GPS to the future. Print it out. Paste it to your refrigerator.
About the turn of the century, two markets turned
Gold turned up
Stocks turned down
These major trends will end
Whence they meet
There you have it. Two markets diverged in a lonely wood. And that has made all the difference! Stocks went up 332 points on the Dow yesterday. But so what? It鈥檚 just a bounce. Noise. Or misinformation put out by Mr. Market, intended to trap unwary investors.
Our view is that the bear market began in January 2000. The feds fought it off with two huge extravaganzas of spending 鈥� the first beginning in 2001鈥he other after 2008.
Stimulus does wonders for stock prices鈥ut it no longer works for the economy that sustains them. For every dollar that the Fed has put to work to fight the crisis since 2008, for example, it has produced only 80 cents worth of GDP. It didn鈥檛 work.
Fighting a credit contraction with more credit is a losing proposition. Eventually, investors are bound to realize that stocks are headed down. Eventually the bear market will resume. And eventually it will come to an end.
But when?
Our guess is that it will end when the Dow and the price of gold arrive at the same point 鈥� probably around $3,000. Whatever the number, you鈥檒l be able to buy the entire group of Dow stocks for the price of one ounce of gold.
Of course, our view is a minority one. Warren Buffett doesn鈥檛 buy it. Most investors don鈥檛 buy it. We don鈥檛 even suggest that you buy it, dear reader. Just remember it. If it turns out as expected, we want to be able to say 鈥榃e told you so.鈥�
And if it doesn鈥檛 work out? Please have the grace to forget we mentioned it.
We would like to be able to predict the future, but we鈥檝e never gotten the hang of it. We鈥檙e just guessing.
But since we鈥檙e just guessing, we don鈥檛 see why we should hold back.
We鈥檙e also guessing that鈥�
鈥he weight of so much debt is depressing growth鈥nd will soon depress stock prices too鈥�
鈥hat the economy is becoming zombified from too much government money鈥specially the military鈥�
鈥hat Mr. Market is ready for a long bear market anyhow; he鈥檚 tanned, rested, and ready to go to work
鈥hat the US is following in Japan鈥檚 footsteps鈥owards a long period of on-again, off-again recession
鈥hat the recession of 鈥�08-鈥�09 in the US never actually ended鈥�
鈥nd that stocks will go down over the next 5-10 years until they finally hit a real bottom.
But wait. Here comes the San Francisco Fed. Can you believe it? It agrees with us. Bloomberg reports:
Aging baby boomers may hold down US stock values for the next two decades as they sell their investments to finance retirement, according to researchers from the Federal Reserve Bank of San Francisco.
Americans born between 1946 and 1964 are beginning to retire as the US stock market is still recovering from the financial crisis that began in 2007 with the collapse of the subprime-mortgage market. The timing is 鈥渄isconcerting鈥� and, since stock prices have been closely tied to demographic trends in the past half century, 鈥減ortends poorly for equity values,鈥� adviser Zheng Liu and researcher Mark Spiegel wrote in a paper released by the bank today.
The equity-price-to-earnings ratio of US stocks tripled from 1981 to 2000 as baby boomers reached their peak working ages, and has declined since then, according to Spiegel and Liu.
Overseas investors鈥� demand for US stocks might help mitigate the effect of a baby-boomers鈥� sell-off, yet the impact would probably be limited, they said.
鈥淔or many primary purchasers of US equities outside the US, their demographics are even worse than ours, in particular Europe and Japan, which have older age profiles prevailing than the US does,鈥� Spiegel, vice president of the bank鈥檚 research department, said in a telephone interview today.
At the same time, foreign investors, including sovereign wealth funds, may decide to hold a larger share of US equities, Liu and Spiegel said. Also, emerging market countries such as China may ease capital controls, allowing their citizens to invest in US equities, they said.
Now, let鈥檚 look at the gold market. Gold prices went down $30 yesterday.
Is it too late to join the party?
Investors don鈥檛 know what to do. They were buying gold this week because the Fed is putting on its annual shindig at Jackson Hole, Wyoming. Everybody knows the Fed sees itself as a booster for Wall Street. They know, too, that QE2 came out of the Fed last summer. That program didn鈥檛 do anything for the economy鈥�
鈥ut what a gift to gold holders!
Gold is up 33% so far this year. And by the look of the chart鈥t could easily finish the year above $2,000. Maybe above $3,000.
But 鈥� remember we鈥檙e just guessing 鈥� gold looks like it has gotten ahead of itself. It looks over-bought. Besides, investors may be expecting too much of the Fed.
Of course, if the Fed comes out with some more high-octane market hooch鈥his party could really go wild. But, it isn鈥檛 likely. Everybody鈥檚 watching. Bernanke needs to give the markets enough juice so they don鈥檛 fall apart on Friday鈥ut not enough so the gold market goes blind.
Most likely, he will encourage investors. But he won鈥檛 cause a panic. Not yet.
And most likely, gold will fall.
Look, we鈥檙e gold bugs here at The Daily Reckoning. We have more faith in gold than we do in the fellows running the world financial system. Not that they鈥檙e not nice men. And they鈥檙e plenty smart. It鈥檚 not that we think they鈥檙e stupid. It鈥檚 just that we think they鈥檙e human. They put on their pants one leg at a time, just like everybody else. And just like everybody else, if you put them under pressure鈥hey鈥檒l crack.
But not yet. Our views on the stock market were severely tested during the big rallies of the 鈥�00s. Now, it is the gold bulls who face a test. Gold has gone up every year since 2000. It鈥檚 been too easy. So, it鈥檚 time for Mr. Market to pull a fast one on gold buyers.
The process of de-leveraging the private sector, following in Japan鈥檚 footsteps, will be long, slow and hard. The feds will fight de-leveraging. They鈥檒l zombify the economy. They鈥檒l make a bigger mess of things鈥�
鈥ut they won鈥檛 create conditions for the real Third Phase of the bull market in gold. Not yet.
Yes, dear reader, you pried it out of us. We were trying to be coy. We wanted to hold off. We thought that maybe if we gave it to you all at once, well鈥aybe you wouldn鈥檛 respect us.
But there鈥e鈥檝e gone and done it anyway. You have our Big Prediction on gold right in front of you. And it didn鈥檛 cost you a penny.
We鈥檙e gold bugs. But we鈥檙e not always gold bulls. And our guess now is that Mr. Market is going to throw us a curve. (Bugs鈥ulls鈥urves鈥hy the hell not?) Yep. He鈥檚 drawing in millions of Johnny-come-lately gold buyers into the market. And now he鈥檚 going to massacre them鈥nd test us.
Because gold is going lower鈥ot higher.
Yep, you read it here first. Stocks are going down. But so is gold.
鈥淏ill, you鈥檝e been saying that gold is going higher for 11 years. Are you now really saying that it鈥檚 probably going down?鈥�
鈥渊别辫.鈥�
鈥淏ut didn鈥檛 you just urge readers to sell stocks and buy gold?鈥�
鈥渊别辫.鈥�
鈥淪o you now think it鈥檚 going down, right? 鈥�
鈥渊别辫.鈥�
鈥淪o, are you selling your gold?鈥�
鈥淣ope鈥� You think I鈥檓 crazy? This is just a temporary setback鈥aybe a few years, that鈥檚 all. This bull market in gold won鈥檛 end until gold and the Dow meet.鈥�
Our guess is that gold goes down鈥hakes out the speculators and weak investors鈥nd then 鈥� perhaps a couple years from now鈥erhaps longer 鈥� begins its third and final phase.
