Thursday , 25 July 2024

8 Reasons Why Gold Crashed & Will Likely Continue to Decline

In virtually all of my writings since October 2011, I had emphasized that gold wasgold-bubble-190x190 extremely overvalued on almost any fundamental measure relative to stocks, real estate, production costs and the CPI basket of consumer goods. I have emphasized that, at current prices, gold is a medium for speculation regarding macroeconomic conditions and is not a suitable instrument for long-term investment or wealth preservation. In my article of April 5th, posted here, I maintained that in the next year, and particularly for the next three to six months, a liquidation phase in the current cyclical bear market in gold would likely develop,,,[causing gold to] fall sharply. [Below are the 8 reasons I mentioned back then which still remain relevant today.]

So wrote James Kostohryz back on April 5th in an article* posted on entitled Gold Is Entering Its Liquidation Phase.

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James Kostohryz went on to say in further edited excerpts:

Why Gold Prices Will Probably Collapse

Gold prices should continue to fall sharply for eight reasons:

1. Lose-lose macro scenario: growth accelerates. The only real hope for gold-supportive inflation to get started is for U.S. and global growth to accelerate, causing an increase in the so-called “velocity” of money. This would create an increase in effective aggregate demand relative to aggregate supply. However, such a scenario would merely trigger an end to the Federal Reserve’s quantitative easing (QE). If U.S. growth speeds up, even the most vocal doves on the Fed are saying that QE will be would down during the second half of 2013. The end of QE would effectively take away the most important source of support for gold prices.

2. Lose-lose macro scenario: growth slows. If growth slows rather than accelerates, then deflation or disinflation are the most likely outcomes. This is clearly a bearish outcome for gold. Even if QE is maintained in this scenario, it is quite unlikely to trigger inflationary fears given the notable failure of QE in the past four years to cause inflation in the face of economic contraction or slow growth.

3. Technical breakdown: If gold completes its break of the $1,550 area [it did], it will have crashed through a key uptrend line and a very important horizontal support area. A break of such a key set of supports would most likely lead to a decline to the area between $1,300 and $1,400 [it did], with even further weakness still possible [time will tell].

4. Liquidation by hedge funds. The spectacularly poor performance of several gold-loving hedge fund managers such as John Paulson and others is likely to spark massive redemptions that will trigger forced liquidations of gold positions, and GLD in particular [that would appear to have happened].

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5. Retail liquidation. The retail investor caused the parabolic rise in gold. Therefore, the correction in gold is unlikely to be completed until there is a massive liquidation by retail investors. Such a liquidation would suggest a target of around $1,300, based on where gold began its last parabolic ascent.

6. Bubble valuations. Gold is massively overvalued relative to stocks, real estate, consumer goods and virtually any asset you can conceive of. Gold is also extremely expensive relative to cash production costs — when these are appropriately adjusted for their parabolic rise in the past few years in sympathy with the gold bubble.

7. The bond connection. It may seem ironic to some, but the only other asset class that is even close to being as overvalued as gold is bonds. A major correction in bond prices may not be imminent. However, it is inevitable. Gold has ridden the bull market in bonds all the way up the past five years; it will likely ride any bear market in bonds on the way down. The fundamental reason for this connection is rather clear: A bear market in bonds implies a very high likelihood of rising real interest rates, and such conditions would be extremely bearish for gold.

8. Strong U.S. dollar. Whether you believe the U.S. economy will accelerate or slow, one thing is virtually certain: The U.S. economy, in relative terms, will be stronger than that of virtually all other developed nations. This means the U.S. dollar will tend to strengthen relative to virtually all major currencies, including the euro and yen. This is clearly a major negative for gold prices.


The only real hope for gold prices would be a massive economic collapse in Europe or the U.S. coupled with hyperinflationary monetary policy. Such a scenario is unlikely to manifest in the next 12 months. To the contrary, the global macroeconomic picture is likely to remain mired between slow growth and mild recession in most developed nations, with a concomitant tendency toward disinflation. This is the worst of all worlds for gold: not enough crisis intensity to trigger a flight to gold as a safe haven; not enough growth intensity to trigger inflation.

[Back on April 5th Kostohryz concluded his insightful article by saying:] In sum, if you have not sold your gold and gold stocks already, sell now while prices are still absurdly high. The secular bull market in gold may not necessarily be over; however, the current cyclical bear market in gold still has another major leg down to go.

Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.


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  1. Anybody still holding Gold doesn’t know how to invest, and has been fear mongered by the right wing media into believing the sky is falling and the dollar will be worthless.

    Should have dumped it when it crashed a year and a half ago.

    Look at the chart. This is a long term downtrend short. Follow the trend and you make money. Fight the trend and you will lose money, as any Gold bug surely knows by now.

  2. I disagree, I think that the recent Plunge in PM’s actually will encourage even more investors to find out about PM’s, after which, they will begin acquire (or add more) PM’s to their portfolio’s.

    I noticed that even during this plunge in pricing the actual amount of PM’s available was very limited and perhaps for that reason alone I believe that we will see a shake out of all those that have been using paper to short the PM market which will be better for investors. I expect in the future that people will look for local buyers for their well known PM sells, since they can do better than going through a Broker that charges a high commission, perhaps even using Craigslist and Ebay.