Background From September 2009 until late June 2011, I was quite bullish on the prospects for gold due to a confluence of factors that created a sweet spot for the yellow metal. On June 29, 2011, I called off my bullish call on gold due to a series of adverse fundamental factors. However, in August 2011, I emphasized that not all the "shoeshine boys" were not in yet, and that there would probably be an upside speculative blow-off in gold. This blow-off, of course, occurred, but since October 2011, I have been loudly warning investors to stay away from commodities, including gold. In particular, in virtually all of my writings since October 2011, I have emphasized that gold is extremely overvalued on almost any fundamental measure relative to stocks, real estate, production costs and the CPI basket of consumer goods. I have emphasized that at current prices, gold is a medium for speculation regarding macroeconomic conditions; it is not a suitable instrument for long-term investment or wealth preservation. Why Gold Prices Will Probably Collapse Gold prices should continue to fall sharply for eight reasons: 1. Lose-lose macro scenario: growth accelerates. The only real hope for gold-supportive inflation to get started is for U.S. and global growth to accelerate, causing an increase in the so-called "velocity" of money. This would create an increase in effective aggregate demand relative to aggregate supply. However, such a scenario would merely trigger an end to the Federal Reserve's quantitative easing (QE). If U.S. growth speeds up, even the most vocal doves on the Fed are saying that QE will be would down during the second half of 2013. The end of QE would effectively take away the most important source of support for gold prices.
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.