Saturday, September 13, 2014

Pento - Why Goldman Sachs Is Wrong On Gold

Pento MichaelMore from Michael Pento in a note to KWN... Wall Street powerhouse Goldman Sachs has recently reiterated its negative view on gold, which it has held for the past year. However, it is now doubling down on this view and advising clients to go short the metal. Jeff Currie, head of commodity research at Goldman, wrote, “Our target is really driven by the view that we think that the Fed will ultimately be the dominant force here and put more downward pressure” on gold prices.

While I agree with Goldman that the Fed will be the dominant force behind the price of gold, I believe the central bank will soon be back into the quantitative easing business, rather than raising interest rates and crushing the dollar price of gold.

Below is the reason why:

Since President Nixon closed the gold window in 1971, gold has made an impressive move up from its fixed price of $35 an ounce to where it sits now around $1,250. But few seem to grasp what actually causes gold to move higher. An increase in the gold price occurs when the market becomes convinced that a currency will lose its purchasing power due to central bank-induced money supply growth and real interest rates that have been forced into negative territory. And nothing convinces a market more of a rising gold price than when debt and deficits explode.

But while the parabolic move higher in gold from 2009 to 2011 did contain a period of low nominal interest rates, real rates did not fall. And the surging gold price was not accompanied by a growing money supply either. In fact, the growth rate of M3 plummeted during 2009 through 2010. It wasn’t until 2011 that the money supply rebounded.

So what would explain the steady move in gold from $800 to $1,900 per ounce during that period? The gold price simply got ahead of itself because the market feared that out-of-control deficits would force the Federal Reserve into an unending cycle of debt monetization, which would engender a protracted period of negative real interest rates, booming money supply growth, and inflation.

Those fears were temporarily ameliorated by the reduction of federal budget deficits starting in 2011. This is because the Fed was, ironically, able temporarily to re-engineer asset bubbles while sending borrowing costs lower, causing revenue to increase and expenditures to decrease. Annual deficits fell from $1.3 trillion in 2011 to $500 billion today. Adding to the gold market’s recent woes is the specious belief held by U.S. dollar bulls that the Fed will be aggressively raising interest rates while the rest of the world is cutting rates. This is the explanation why gold and gold mining shares have suffered mightily for three years.

Today the equity and bond markets have positioned themselves for the best outcomes of all possible scenarios. These markets are assured that the Fed can painlessly exit QE in October and real interest rates will rise with no ill effects on the economy. The pervasive belief is that US bonds, stocks, and dollars will be the sole beacons of economic hope in an otherwise slumping worldwide economy; and that budget deficits will continue to shrink.

I don’t buy any of it, and here are the reasons:

For the remainder of the story, follow this link.  KWN


The Original
Vulture Speculator

Trading gold, silver and mining shares since 1980 with a focus on taking advantage of volatility extremes, Gene Arensberg analyses the markets through a basket of technical and fundamental indicators and shares his findings from time to time here at Got Gold Report. Mr. Arensberg has been quoted in the Wall Street Journal, Dow Jones MarketWatch, USA Today and dozens of other news organizations.

"I've been a huge fan of Gene and his amazing work for years..."

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