Wednesday, July 3, 2013


“Gold's second quarter price plunge is now the largest on record, dropping 23% in the last three months to finish a little over $1,200. Wall Street is gloating that a new metals bear market is upon us. A Duke professor even forecast gold returning to its "fair value" of $800 or lower. Naturally, he was quick to point out that he wasn't offering investment advice, only academic speculation.

For those of us who examine commodity fundamentals, the overwhelming conclusion is that the yellow metal simply cannot stay at these low prices for much longer. Gold is nearing a point at which miners are forced to scale back their operations, thereby pinching supply. Not only is diminished production likely to halt gold's downward trajectory, but an imminent supply crunch could also propel gold back to new highs. The likelihood of a strong rebound is supported by both a struggling mining industry and gold's performance during the last great bull market of the 1970s.

Domestic Policy vs. Commodity Fundamentals

If you listen to the US financial media, you might think gold's price is solely determined by events in the domestic economy. The generally accepted narrative of gold's correction is fairly straightforward: the US economy is slowly recovering with seemingly low inflation, and the Federal Reserve is now hinting at unwinding its quantitative easing programs by this time next year.

I've argued against these renewed recovery fairy tales for months, reminding my readers and the media that the fundamentals of gold remain very strong. The recovery mindset is mostly driven by misguided consumer sentiment, unreliable government data, and, most importantly, the Fed's ongoing injections of cash into the economy.

As far as tapering or even ending QE, even the IMF agrees with me that the Fed has "no clue" how to do this. Last month, when Bernanke simply mentioned the idea of halting QE within the next year, global markets went into a tailspin. Imagine how much worse things would be if the Fed were to stop talking and actually take action to taper.

Meanwhile, it is important to remember that gold is a global commodity. While the US has a huge impact on global financial markets, gold itself has no special allegiance to any particular nation-state.

With the latest drop in gold's price, the time has come to take a closer look at these commodity fundamentals.”

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