Could Gold’s trend suggest we are headed for another recession?

Gold is currently in an eight month down trend.  So what are the possibilities that gold’s downtrend could suggest?

A first notion could be that gold simply became overvalued starting after July of 2010 which is roughly the last time it was trading at the value it currently trades for today (July 16th, 2013).  After July 2010 the value of gold took about a year to peak at a price about 58% higher. Then it wavered near those highs for about  year, before dropping to, in this scenario, become more realistically valued as the price declined back over the last eight months.

Helping the drastic rise and fall could be the popularity of Gold Exchange Traded Funds (ie GLD, GTU, CEF, etc).  Gold ETFs have made it easier for the masses to purchase gold, so when market mob decides its in season, a lot of money can quickly surge into Gold and inflate the value (at least on virtual paper – but the difference between paper gold and physical gold is a subject for another article).  When the mob decides to exit, a lot of money can quickly leave, causing the value of gold to decline.

Another way to look at the current 8 month down trend could be that gold stayed reasonably valued as the Federal Reserve’s quantitative easing programs have devalued the dollar, thus making gold worth more.  Then Gold’s decline could indicate that though we are continually given data to suggest that the economy is doing well, the economy is really not very healthy, quantitative easing is becoming less and less effective, and gold is therefore secretly leading the charge into a recession or possibly even a depression where everything, including gold, becomes highly deflationary.

I know, you say… “Gold is a defensive commodity.  When people the world predicts a recession or depression, money is moved into gold and therefore the price of gold rises”.   I would agree with you, stating that yes, when a recession or depression is predicted, money is moved into gold and the price of gold rises.  But the world is not predicting a recession or depression and in a depression, everything loses value, including gold.  During a recession, what would cause gold to rise, would be the Federal Reserve “printing” even more money in an attempt to stimulate the economy and therefore gold would become the defensive place for money to flow into, due to fears of inflation and devaluing of the dollar.

Or, golds current decline could mean that everything that is happening in our economy is going well.  The reports we get on the economy are truthful and accurate.  Businesses are doing better and better, people are able to find jobs, unemployment is going down, etc.  Possibly the Federal Reserve’s quantitative easing programs are working wonderfully and stimulating the economy while not causing inflation and that is reflected in the current price of gold.

I don’t necessarily believe that gold is predicting a recession, but I am willing to accept that it is a possibility.  We’ve all heard the anecdote that Federal stimulus is like crack to the economy –  We are being loaded with a great feeling, but it takes more and more of the stimulus drug to keep the economy high.  We could be at a point where the current amount of continuing stimulus QE3 (currently 85 billion per month) isn’t enough to keep the economy high.  It needs even more stimulus to stave off the recession and following depression that would come without it.

Personally I think the future of gold’s price has some dependence on the regime in place.  Currently the democrats are in control and are very liberal in their spending.  Sure we have all these sequestration cuts, but if you look closely enough, most of the cuts are in the future, so who knows if they’ll really happen.  Its funny that when Enron did the same thing, it was illegal and the house of cards ending up falling down.  Luckily our government is more powerful than a single company.  If the republicans take over in the next presidential election and decide to halt a lot of the spending, I think we’ll see some drastic action in gold.

Do I really know where gold is going or what it is predicting?  Not really. I don’t believe to that in-tune with the market.  But I am a contrarian investor, and gold is currently down nearly 35% from its peak.  With its continual decline, it looks like it could be reasonably priced, and likely tending towards undervalued.

This undervalued pricing in gold, has a drastic effect on the mining sector and the miners are trading at very low prices relative to their peaks.

I have been buying and I believe it is a great time to start purchasing down in a proprietary pyramid fashion that I’ve developed over my years of successful investing, and I’ll discuss what that means and give deeper reasoning why I believe its time to purchase the mining sector in another article.

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