Why Gold Is Heading Lower…

| March 20, 2012 | 3 Comments

Price of GoldGold’s had an epic bull run over the past seven years.  The precious metal rallied from just $400 an ounce, to reach a high of over $1,900 in September of 2011… a gain of over 380%!

But to quote literary legend Robert Frost, “So dawn goes down to day.  Nothing gold can stay.”  And so it is the same for the rally in the sultry metal quoted by the celebrated poet.

I guarantee many gold bugs will greatly disagree with me.  They’d cite the devaluation of the US Dollar, the collapse of fiat currencies, the accumulation of gold in Asian countries, etc…

But fundamentals are changing in favor of a gold selloff.

Here’s why…

Many of you have heard of the various Quantitative Easing programs run by the Federal Reserve over the past four years.  These programs go by the nickname QE1, QE2, and as of right now, ends with Operation Twist… a sort of “QE2.5” if you will.

These programs were rolled out to aid the US economy in avoiding deflation and entering into another great depression.  But the QE programs also had another side effect… creating a surge in commodity prices. 

The reasons why this happened could fill an encyclopedia.  But the basic idea is, every time the Fed added money to the existing supply of dollars (that’s what QE is), the value of the US Dollar fell, interest rates dropped, and commodity prices surged.  Of course, this includes gold!

Take a look at what each QE program did to the already rising price of gold…

Gold price during QE programs

You can see that each time a QE was rolled out and money supply was increased, the price of gold surged.  Better still, the rally in the yellow metal picked up pace in both the anticipation of each QE and during its actual implementation.

But what you’ll also see is that Operation Twist didn’t drive gold higher.  That’s because this “QE2.5” didn’t actually increase money supply like QE1 and QE2.  And that’s important to note.

As I said earlier, the fundamentals are changing…

Gold has rallied into and with each additional QE round.  And as the US economy failed to improve, each QE program helped keep things from turning much worse.

However, the US economy is now finally on track to continue its recovery without any further monetary stimulus.  And that means the odds of another QE program (QE3) are decreasing.  There’s simply no reason to suppress interest rates any further if inflation and growth are rising in the US.

A secondary reason gold is ready to collapse has to do with fear… or the lack thereof.

If you’re unaware, another use for gold is as a hedge.  And many investors have used it as a safe place to hide during a very stormy recovery in the US market.

Now unless you’ve been asleep, you’d know the US stock market is rallying.  In addition, issues in Europe now appear to be mostly under control (that’s an entirely different discussion).

The bottom line, any argument for holding gold is falling apart fast…

If you’ve been buying gold penny stocks such as junior gold miners, you should consider selling these companies now… before the floor falls out of the gold market.

When gold collapses, companies reliant upon an increase in the price of gold to help improve profits… will sell off.   And if you don’t sell them ahead of a gold collapse, you’re going to be in big trouble.

Some of these micro-cap gold exploration companies will simply fold up, much like the ridiculous tech companies that went under when the tech bubble burst.

It may not be this week, or next week… but gold is headed lower in the coming months.   And when the Fed announces its first interest rate increase or confirms there will be no QE3… look out below!

Editor’s Note:  Discover how to make real money investing in penny stocks by reading our free report.  Penny stock pro, Gordon Lewis, has put together a “must read” breakdown for anyone looking to profit in micro-caps.  Click here to check it out.

Until next time,

Brian Walker

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Category: Commodity Stocks, Gold Stocks

About the Author ()

Brian joins the Penny Stock Research team as a seasoned independent trader and financial analyst. Brian graduated with a B.S. from the University of North Florida and now resides in Scottsdale, Arizona. With a background in economics and statistics, he has a keen ability to uncover profitable and growth-focused companies. He has years of real life know-how in analyzing fundamental and technical data that gives him an edge drilling down on companies and financial results. With over 15 years trading experience, Brian has become an expert in the ever-changing equities markets. Today, he scours the markets hunting for penny stocks that offer low risk and high reward.

Comments (3)

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  1. Hal (GT) says:

    The lack of QE talk is one of those things that many have pointed to as being a reason that the bull market has come to an end, but frankly, I’ve heard that kind of talk before. And gold continues to move up. To me gold’s move has been a relation of debt. As debt increases globally the price of gold has increased. And because nothing has changed in this area, I believe that the bull market will continue.

  2. jstone says:

    I’m actually quite surprised that gold hasn’t dropped more, and the fact that it hasn’t may be an indication that there is still fundamentally a bull market even though certain pressures are keeping the price more or less steady.

    Gold and monetary woes just aren’t being talked about as much. The news on these topics back in 2009-2010 were like a marketing push for gold. The overall number of people aware of and interested in gold investments increased dramatically, which drove excess demand. That growth in potential investors is no longer there.

    On the other hand, the ECB has been talking about gold recently and factions within the US government is looking at ways to return to a gold standard of some sort. Some of the states have even passed laws making gold and silver legal tender again. This should be an upward pressure on the price.

    Finally, slow but present economic recovery in the United States would typically be a downward pressure on the gold price, but I believe it is somewhat offset by uncertainty over federal policies that might restart the “inflate and spend” cycle. I think people are just holding on until the November US presidential elections to decide how likely that is.

    There is a lot of uncertainty and I’m not really sure which way gold will go in the next two years. I think a lot rides on the ECB/IMF discussions and the policies of the next president of the united states. If they make moves that push gold’s value up BEFORE the global economy recovers significantly then I think we’ll see more and lasting price increase. If they don’t, I think gold will fall drastically.

    • Brian Walker says:

      You make excellent points jstone.

      In fact, I just released an article today advising gold will continue higher with the renewed expectation of QE3 or ECB bond buying. http://www.pennystockresearch.com/get-your-4-gold-here/

      Long term, we may see gold sell off as dramatically as it has in the past.

      That makes gold a purely speculative investment at these levels, versus an inflation hedge (as it traditionally has been purchased for). Overall, investors need to be watching the spot price of gold and the news at all times. Once a move starts, it tends to be swift and powerful.


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