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Gold Is Entering Its Liquidation Phase

Stocks in this article: GLD GDX GDXJ NEM ABX GG

2. Lose-lose macro scenario: growth slows. If growth slows rather than accelerates, then deflation or disinflation are the most likely outcomes. This is clearly a bearish outcome for gold. Even if QE is maintained in this scenario, it is quite unlikely to trigger inflationary fears given the notable failure of QE in the past four years to cause inflation in the face of economic contraction or slow growth.

3. Technical breakdown: If gold completes its break of the $1,550 area, it will have crashed through a key uptrend line and a very important horizontal support area. A break of such a key set of supports would most likely lead to a decline to the area between $1,300 and $1,400, with even further weakness still possible.

4. Liquidation by hedge funds. The spectacularly poor performance of several gold-loving hedge fund managers such as John Paulson and others is likely to spark massive redemptions that will trigger forced liquidations of gold positions, and GLD in particular.

5. Retail liquidation. The retail investor caused the parabolic rise in gold. Therefore, the correction in gold is unlikely to be completed until there is a massive liquidation by retail investors. Such a liquidation would suggest a target of around $1,300, based on where gold began its last parabolic ascent.

6. Bubble valuations. Gold is massively overvalued relative to stocks, real estate, consumer goods and virtually any asset you can conceive of. Gold is also extremely expensive relative to cash production costs -- when these are appropriately adjusted for their parabolic rise in the past few years in sympathy with the gold bubble.

7. The bond connection. It may seem ironic to some, but the only other asset class that is even close to being as overvalued as gold is bonds. A major correction in bond prices may not be imminent. However, it is inevitable. Gold has ridden the bull market in bonds all the way up the past five years; it will likely ride any bear market in bonds on the way down. The fundamental reason for this connection is rather clear: A bear market in bonds implies a very high likelihood of rising real interest rates, and such conditions would be extremely bearish for gold.

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