Saturday, March 13, 2010

What about Gold in the Next Down Leg?

Viresh Amin emails:
In the next leg down..deleveraging will flare up again, do you think this time it will be different for gold? The last big deleverage hit gold bad, but this next time Peter Schiff says it will be different.
With all due respect to Peter, I think gold will break under $1,000 in the next down leg. Gold is an inflation hedge. The Fed's tight money policy means there simply will not be enough dollars to support the current price.

I hasten to add that this is a short to medium view. Long term, I expect Bernanke to print dollars in record numbers, this will be very bullish for gold, but we have time. I will likely change my bearish view on gold, if gold trades down to $800 per ounce or if M2 money supply growth climbs above 5% on annualized basis for three months straight.

The belief that gold performs well during a downturn in the business cycle is a myth that was born out of FDR's manipulation and support of the gold price (driving the price up by 67% to $35 per ounce, in the middle of the Great Depression). He did it at the instigation of Bernard Baruch and John Maynard Keynes. Without FDR propping up the price, it would have collapsed.