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A Multi-Month Correction in Gold Starts NowBy
Friday, August 12, 2011
How could gold fall now?
After all, everything possible is going right for gold...
First and foremost, gold is financial catastrophe insurance... And the threat of financial catastrophe is the highest it's been in years.
Second, when interest rates are zero, gold soars. And right now, interest rates are zero. You see, when interest rates at the bank are 5%, and gold is paying zero (as always), investors choose to put their money in the bank. But when the bank pays zero, and gold pays zero, investors hold their money in gold – an asset that can't be printed.
This is exactly what has happened since the Federal Reserve cut interest rates to zero in 2008.
And the story just got even better for gold...
This week, the Federal Reserve announced interest rates will stay near zero for the next two years!
So gold just got a "green light" from interest rates for two years... and the threat of financial catastrophe is high. It's time for gold to soar! Right?
Here's my take...
Everyone reached that exact conclusion earlier this week. It's what caused gold to jump from $1,600 to $1,800 just in the month of August (which hasn't had that many trading days).
For the moment, the trade is "full." Everyone trading gold realizes the two things above. And the latecomers who wanted to own it have now finally bought. Unfortunately for them, they're going to get hurt...
This gold market feels a bit like the market in silver in mid-April 2011. On April 15, I told my True Wealth subscribers:
Silver peaked later in April close to $50 an ounce... Then, it crashed violently to $35 an ounce.
The latest sentiment numbers on gold are not out yet. But I bet they're at the highest levels in years. I expect gold will have a healthy shakeout, to kick out the Johnny-come-latelies.
Based on history, gold could fall and then struggle to gain a head of steam over the next two to three months.
Then I believe it will resume its bull market. With ever-growing U.S. debts and interest rates at zero, gold can't do much else but go up in the long run.
In short, I expect a multi-month correction in gold... followed by a resumption of its long-term bull market.
Good investing,
Steve
Further Reading:
While traders will want to watch for a downturn in gold, here at DailyWealth, we take the "long view." We don't see it as a commodity. We don't see it as an investment. We see it as money... as a "real wealth" insurance policy you hope to never use. So if gold does drop, make sure to keep this chart in mind.
Market NotesTHE STOCK MARKET'S RIVER OF LOSSES Today's chart is a lesson on why you shouldn't think of just stocks when you hear the word "investing."
Regular readers have seen lots of "outside the stock market " ideas in DailyWealth. We're fans of timberland bought at the right price. We've shown you how to use safe stock options to reduce your risk. We've urged you to own gold and silver since we began publishing in 2005. We've shown you unique currency and real estate strategies. The chart below is why...
The chart below shows the past 12 years of trading in the benchmark S&P 500 stock index... the index professional investors use to gauge stock returns. As you can see, this index sat around 1,300 in 1999. Since then, it has gone through an incredible series of rollercoaster highs and lows, "flash crashes," and sheer panics to register a negative return (and a horrifically negative return in gold terms).
Considering the story this chart tells, we once again remind readers to think of all sorts of things when thinking about "investing." Think timberland, safe options, gold, silver, lending, cash, and owning great businesses in addition to stocks. There's a good time and place for it all of them.
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