Bulls Versus Bears

Gold Wars

The gold price and its slight fall is something which has been gaining quite a lot of attention in the media recently. Jan Skoyles outlines how those who are bearish on the gold price have been quite outspoken on this issue. But they hadn’t quite  been prepared for the backlash from the bullish gold bug community. Who would you rather listen to the experts or the true investors?

Late last week and into this week, amongst the trash that is the Eurozone discussions and the various announcements from panicked central banks, the gold price has been having a little break. So does this mean that gold’s 13% fall from its record $1,921 on September 6th signals the end of the golden bull market? Apparently so, according to the papers and other experts.

How many times have we heard over the last decade that the gold bubble has burst only for it to hit yet another new high? At the end of September 2011, gold fell from a record high of $1,920 on the 6th September, to £1,530 at the end of the month. For some this was disappointing but understandable, for others it was finally proof that gold had been in a bubble.

The former group of people were the true hard asset investors, or gold-bugs. The latter group were the financial media, central bankers and all round Keynesians, or, the experts.

The last fortnight has seen gold fall once again from favour. It had climbed well, to $1,800, after its September drop, but has fallen again, and once more the experts are declaring we are seeing gold’s demise. As a result the battle between the naysayers and the gold bugs has intensified.

 End of gold’s golden hour?

This drop in the gold price is not unusual and the reasons for it doing so are not uncommon either – a rush for liquidity and a possible COMEX commercial rig job, according to Ted Butler. However, many economists and market experts are absolutely convinced this is the end of gold’s golden hour. So much so that one of them, Dennis Gartman has sold his last few ounces of gold.

In the Gartman report, Dennis Gartman, who correctly predicted the 2008 commodities slump, announced that he is so bearish on gold that he has sold up. He writes.

“Since the early autumn here in the Northern Hemisphere gold has failed to make a new high…Each high has been progressively lower than the previous high, and now we’ve confirmation that the new interim low is lower than the previous low. We have the beginnings of a real bear market, and the death of a bull”

Gartman isn’t the only expert who is bearish on gold. Jeff Christian of CPM Group recently tried to prove in a presentation to investors the instability of gold versus the stability of fiat money.

  • The only monetary system that has not failed is the current one.
  • Gold’s purchasing power is neither constant or stable
  • Gold is not a store of value

Jon Nadler, of Kitco, is equally dismissive of the gold bug. He wrote recently that “you might just want to consider why it is that an entire generation of investors who bought gold at roughly $300-$500 is letting go of at least some of its stash. Hint. It has to do with record prices and the rising need for cash, in so many words, the very reasons the gold was purchased for, in the first place: potential profit and the liquidity it provides in times of trouble.”

Nadler is trying to confirm that the imaginary gold bubble is over. Bill Fleckenstein, one of the best in predicting bubbles and general on goings in the gold market, responds nicely to these gold bubblists.

“I have not bothered to say much about the supposed gold bubble, because the idea is so stupid it hardly merits a comment. But it occurred to me that virtually no one who recognized the stock and/or real estate bubble now says that gold is a bubble. In fact, almost all of us who warned of the prior bubbles long before they burst actually own gold. It is really only the people who missed the previous two who now think gold is a bubble. Why is it the case that the people who have been so wrong in the past think gold is a bubble and the people who have been right think it isn’t? But such is the nature of bull markets.”

Elsewhere, Roubini, who seems to be on a personal vendetta against goldbugs, is doing marvellous job of denying gold’s strengths whilst making himself look daft at the same time. Upon the recent drop in the gold price, Roubini tweeted.

“Gold at a 7 weeks [sic] low down to 1635. Where is 2000 gold dear gold bugs?” He said, and, later in the day, “Gold bugs in hiding as gold prices plunge.”

Well maybe he’s right. Maybe we should all hide. But then again, back in 2009, Roubini gleefully tweeted, “all the gold bugs who say gold is going to go to $1,500, $2,000, they’re just speaking nonsense”. Oops.

How did I end up in a gold war with an unarmed opponent?

The best response has been from Jim Rickards. Mr Rickards is of course a renowned strong supporter of gold and was one of the first to advocate a return to the gold standard.

Mr Rickards has been drawn into a “Twitter War” with Mr Nouriel Roubini. The main premise of the debate is whether a return to the gold standard would be a good idea.

Looking over the responses of each of them it is very easy to see who is the most well-read out of the two – Rickards. He has studied both sides of the argument when it comes to gold and its history. Roubini however quite clearly has not.

Mr Rickards himself portrayed the situation of this latest Gold War brilliantly:

“How did I end up in a Twitter war with an unarmed opponent?”

Not so fast, says Bill Bonner in the Daily Reckoning in response the anti-goldists. This is merely the gold market having a bit of a ‘shake-out’.

“Gold has been going up for 11 years straight. Or is it 12? It needs to settle down. Rest. Catch its breath. And, like a lover, it needs to test its most ardent admirers.

How far would it have to go do to give gold buyers a proper shake-out? Maybe to 1,300. Maybe 1,200. Typically, a bull market retraces nearly 50% of its gain before completing its rendezvous with the top.”

Bonner, as a side note, compared to those who are dismissive of the gold bull market, has been writing about gold and the financial markets since 1979. Back in August and September, this year, he warned that gold stocks were due for an imminent drop.

Are the experts looking for the same signs?

In the September 19 issue of Barron’s, an interviewer asked James Grant, editor of Grant’s Interest Rate Observer, whether the gold market was in a bubble (according to the Daily Reckoning). Grant replied:

A bubble is a bull market in which the user of the word ‘bubble’ has not fully participated. You can think of gold as a stock that went from 2 5/8 to 18 in a dozen years. I’m not sure that’s a bubble… What I do think is gold is simply the reciprocal of the world’s faith in the institution of managed currencies. It is one divided by T, where T stands for trust. And trust is a shrinking number and will continue to shrink. Therefore, I am bullish on gold.”

James Turk, founder of GoldMoney, points out the one thing these non-supporters are missing:

“What’s important is not the price of gold, but rather, its value…Gold is sound money, which everybody should be saving.”

Put your money where your mouth is

Peter Grandich, a highly respected commentator in this space, has wagered Gartman, Christian and Nadler $1 million in regard to the gold price, asking them to put their money where their mouths are:

“I will wager any one of them (or a combination of all three) one million dollars U.S. that gold will hit $2000 before it hits $1,000 on the COMEX. I have arranged for the law firm of Lomurro, Davison, Eastman & Munoz of Freehold, New Jersey to hold the funds in trust. For once, let one or all of the most arrogant and often wrong gold forecasters truly put their money where their mouth is when it comes to gold forecasting. This offer shall be good until midnight, December 31, 2011 (I will donate my winnings to charities).”

At the time of writing no one had taken Grandich up on his offer. Does this suggest that perhaps the fiat bugs are in fact unable to put their money where their mouth is?

Bullish on gold

We don’t think that gold is still in a bull market just because these people have far more experience when it comes to making predictions; we think that gold is still on the up because the fundamentals are all in place. Eric Fry of Agora Financial writes:

“…the bull case for gold (and also for silver) has little to do with short-term noise and volatility. Rather, it is the long-term story that matters most — the story of the “derangement of money and banking.” And that’s the kind of story that could produce another spectacular run in the gold price!”

Whether you look at the short term movements or the economic fundamentals of the gold price, we feel the quote answers the question of who to listen to quite nicely:

Ask yourself how well you would have fared listening to Bernanke, Greenspan, Roubini, Gartman or Christian?” Dominique de Kevelioc de Bailleul

Jan Skoyles contributes to The Real Asset Company’s Research Desk. Read more of her writing and ask her questions on Facebook or Twitter.

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About the Author

Jan SkoylesJan Skoyles is Head of Research at The Real Asset Company, a platform for secure and efficient gold investment. Jan first became interested in precious metals and sound money when she met Ned Naylor-Leyland whilst working alongside him in the summer of 2010. Jan then went on to write her undergraduate dissertation on the use of precious metals in the monetary system. After graduating from Aston University in 2011 Jan joined The Real Asset Co research desk. Her work and views are now featured on a range of media including BBC, Reuters, Wall Street Journal, Mail on Sunday, Forbes and The Telegraph. She has appeared on news channels including Russia Today to discuss the gold price and gold investing. You can keep up with Jan's commentary by subscribing to our RSS feed Gold Investment News.View all posts by Jan Skoyles