Wednesday, December 2, 2009
Gold prices seem to rising at a parabolic rate, which suggests that the market is just a tad bit too bullish. Gold could continue its run, but as we approach the levels (in constant dollar terms) that we saw in 1980, gold becomes extremely vulnerable to anything that could be considered "bad," such as an unexpected Fed tightening or a stronger than expected economy. It's easy to see why gold can continue to rise, since almost all the world's major central banks are extremely accommodative. Plus, gold thrives on the popular view that the future of the U.S. economy lies on shaky ground, and the prospect of trillion dollar deficits for as far as the eye can see is disturbing, to put it mildly.
I'm not trying to argue against gold going higher, but rather that, as we approach the peak levels of 1980 in inflation-adjusted terms, gold becomes very vulnerable to any bad news such as unexpected economic growth or an earlier-than-expected central bank tightening. Gold is now a highly speculative investment, even though the facts strongly support the bullish case. Lots of people are buying the stuff these days, and I'm sure most buyers are figuring they can make a quick buck and protect themselves with a tight stop. Beware the wisdom of crowds.
Posted by Scott Grannis at 7:49 AM