Hyperinflation is coming! No, seriously! Yes, I know that I’ve been saying that since 2008 and that I’ve also said that it would be due to QE and low interest rates and now the Fed has signaled that these might come to a slow soon, but still it’s totally coming! What should you do? Buy gold, of course. Oh, and my website just so happens to sell gold — and tinned food; make sure to buy lots of tinned food.
Seriously though, the gold bugs are getting burned like there is no tomorrow these days. Check out this entertaining clip of an economist who studied the long-run trend of gold prices:
Of course, such studies should be looked upon with some skepticism. The future, after all, is not a perfect mirror of the past. Still, as I divined back in February using some rather unusual, erm, data-points, gold is likely to continue it’s fall in the coming year and I’ve heard crazier estimates than $800 as the price it will revert to. Oh, and for all you folks interested in the underlying dynamics of the gold market I cannot recommend this absolutely fantastic analysis by hedge fund manager Mark Dow enough.
Although I was aware of most of this analysis myself Dow points to something I had missed: the extremely low price elasticity of gold. For all those of you who have not been indoctrinated in the jargon of the dismal science in practical terms that means that when even a small amount of gold is dumped on the market its price must fall substantially before a buyer is found. What this tells us is two things. (1) That gold is less a hot commodity than a hot potato commodity — outside of a select group of cultists no one wants the stuff. (2) Any time an “event” happens in the gold market that signals a sell opportunity — as, for example when Bernanke announced the QE taper — the price effects are going to be substantial.
While I’m not in the business of giving investment advice (right now, anyway…), that makes it a very attractive short for gold bears because in the medium to long-run there is substantially more downside risk than upside risk. In plain English: the chances of the gold price falling substantially is far, far higher than the chances of the gold price rising substantially — the latter of which to me seems almost non-existent outside of some completely unforeseeable event.