Priced for Collapse
Where is the gold price today? If you're like many Americans, you have no idea whether it went up, down, or sideways. Fortunately, I know my readers to be more informed - you likely know that after falling from almost $1900, gold has been trapped around $1600 since early May. But you may still be curious why despite continued money-printing and abysmal US economic reports, gold hasn't been able to hit new highs.
Here's the truth: gold is currently priced for collapse. Many investors believe the yellow metal has topped out and are selling into every rally.
Nerves of Tin
Being a gold investor is tough business. The last thing any government or corrupt big bank wants is to have a bunch of people putting their savings into hard assets - and gold is one of the hardest of all. So we're constantly up against tides of propaganda saying that gold has no value or is the refuge of doomsayers.
Nowhere is this pessimism more evident than in gold mining stocks. Rising inflation has driven production costs higher, but the mistaken belief that inflation is contained and Treasuries are a safer haven is keeping a lid on gold prices. As such, many of the major producers have missed their earnings projections, and their share prices have been punished. This has placed a cloud over the entire sector. In fact, the P/E ratios of major gold miners are near record lows. Stock prices reflect future earning expectations, and judging by the low P/Es, Wall Street expects future earnings to plummet. This likely reflects their bearish outlook for gold, which is generally viewed as a bubble about to pop.
Chronic Memory Loss
Unfortunately, there is no public validation for those who have proved the gold doubters wrong. A couple of years ago, I predicted gold would cross $1500 and even my own staff thought the call was too risky, too extreme. But I knew then, as I know now, that at the end of the day the gold price is not a mystery - it's a proxy for dollar weakness.
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The Opportunity of the Decade
After spending the previous fall and winter testing new nominal highs above $1800, future investors may come to view spring and summer 2012 as the opportunity of the decade. Gold has shown its strength and retreated. While most investors will take that as a signal that the market has topped, some will take advantage of the general trepidation to add to their positions at hundreds of dollars off the highs.
What Happens Next
I've seen markets like this before, and by making some reasonable inferences, I have a good picture of how this could play out. Gold will continue testing the $1600 barrier until it surprises to the upside. This could be spurred by the announcement of QE III, a calming of fears in Europe, or any shock to the Treasury market. Treasuries have temporarily overtaken gold as the primary safe-haven asset. Once that dynamic is broken, I believe the counterflow into gold will be tremendous.
Prepare For Collapse
The key to this market is to understand that a price collapse is coming - but not for gold. Instead, the market for US dollars and dollar-denominated debt is headed off a cliff, which will send the price of precious metals soaring.
Peter Schiff is CEO of Euro Pacific Precious Metals, a gold and silver dealer selling reputable, well-known bullion coins and bars at competitive prices.
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