The all-time high in gold futures was set back in the late summer of 2011 when it briefly surged to over $1900 an ounce. Lately, gold has been trading around $1650. But, why? All the usual economic arguments are still good: huge deficits in the U.S., a weak dollar and interest rates near zero. Even the scare factor arguments are as formidable as ever: terrorists murdering a U.S. ambassador in Libya, al Qaeda flying their flag over the U.S. embassy in Egypt and the Taliban set to reclaim Afghanistan when the U.S. military abandons the fight on a preset date. Certainly the gold hucksters are still on TV. One broker promises to sell at only one percent over THEIR cost – as opposed to THE cost. (Wouldn’t it be great to have a customer base that always paid one percent over whatever your cost was thereby guaranteeing you a profit?) When the market goes down, will they agree to buy it back at only one percent under YOUR cost?
All of this, obviously, suggests that there is a speculative bubble in the gold market. If you thought the night club fire in Brazil last week with a drunk crowd of dancers all trying to exit through one door was tragic, imagine the price action when gold speculators, all intoxicated with images of $10,000 an ounce gold and other sugar plumbs dancing in their heads, try to get out of a market that may have no door at all. The one ultimate reality of the speculator is that, eventually, he/she must sell. Gold’s inability to rally and make new highs in spite of a hundred reasons to do so, may well be attributable to a speculative environment where traders are all long the market looking at each other and wondering “who am I going to sell this to?”
Gold has no practical use to these “investors.” They can’t eat it or drink it; they can’t drive it or live in it or wear it (those hideous gold chains not withstanding); and, they can’t pile it in their front yard with a light shining on it to impress their neighbors because someone will probably steal it. If some of these people are financing gold purchases with Bernanke’s cheap borrowed money, it could be a double jeopardy scenario of rising interest rates attracting investors out of a depressed gold market. The point is that the gold speculator eventually will have to sell. The wild card in gold – and probably the real estate market as well – is interest rates. When Benny and the Feds finally bleed the last tax payer dollars out for the last quantitative easing (are we in QE 3 or 4 now?), rates will shoot up, home buyers will scramble for mortgages bidding up housing prices and all the little old ladies who rummaged through their attics for scraps of gold to sell to the pawn shops will look like geniuses. And God bless them.