September 13, 2013
Financial circles in Hong Kong are buzzing today on the new Goldman Sachs projection that gold may drop below $1,000 an ounce.
And in merely suggesting such a death sentence for the metal, Goldman’s pronouncement pushed the paper price of gold contracts down $20+.
Many technical indicators underscore Goldman’s views. There’s very little floor for gold prices below $1,200, signaling that gold could gap down quickly.
Conventional wisdom is also moving against precious metals. Newspaper headlines are telling us that emerging markets are toast (India, Indonesia, Brazil) while the developed economies (US, Europe, Japan) are on the mend.
Of course, the facts don’t really support this.
- Unemployment in much of southern Europe continues to soar, and Greece is imminently in need of yet another bailout.
- The Japanese government’s most recent budget numbers indicate payments on the national debt totaling 22.2 trillion yen, which constitutes 51.5% of the government’s 43 trillion yen tax revenue.
- In the Land of the Free, the US government is just a few weeks away from defaulting. Again.
Since May, in fact, the US Treasury Department has resorted to ‘extraordinary measures’ to keep the debt level firm at $16.7 trillion (the current debt ceiling) by using clever accounting tricks and confiscating funds from other sources.
As soon as the debt ceiling is raised, however, the national debt in the US will soar once again as these accounting tricks are unwound and reflected on the balance sheet.
For whatever reason, though, few people are paying attention to facts. It’s all about sentiment. And the sentiment right now is that the rich Western economies are back on top.
This is the central thesis underpinning Goldman’s assessment on gold: since the US economy is out of the woods, there’s no longer a need for gold as a risk hedge.
But as my friend told me last night over drinks, “Nobody knows what the f**k is going on…”
He’s a senior-level manager at a major international investment bank, and fully expects the banking system to go under again.
I thought about his candid remarks this morning when I read Goldman’s projection on gold.
But it does beg the question– is it time to get out of precious metals? After all, the momentum is moving in that direction.
Well, if you buy gold hoping to sell it at some point in the future and receive more fiat currency than you paid, then you might as well get out. Gold is not a great speculation right now.
Think about it like this– and take ‘gold’ out of the equation. If the market for widgets had risen 10, 11, 12 years in a row, and had shattered all records for long-term performance, would you still be betting on a rise?
Probably not. Just like housing (which everyone thought would go up forever), gold’s nominal paper price can fall. And it makes far more sense to speculate on something that’s in the dumps right now.
However, this mentality entirely misses the point of precious metals.
Why buy gold hoping to gain more paper currency down the road? Owning gold is all about trading away your paper currency into something that cannot be conjured out of thin air by central banks.
When stored properly (holding physical gold overseas and/or anonymously), there is very little counterparty risk.
The “price” in paper currency may rise. Or it may fall. But this is largely irrelevant.
When the hopes and dreams of the entire global financial system rest on the lies of politicians, the whims of central bankers, and the mountains of debt they have all accumulated, things could turn on a dime… tomorrow.
Gold is an insurance policy. It’s a form of money that you might never need to use. But should that need ever arise, you’ll be so much better off for owning it.