A Bear Speaks: 2 Good Reasons Why Gold is Toast

Posted by Jack Crooks: Black Swan Capital

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“The Dollar and Oil May be Telling Us Gold is Toast”


“Speaking the Truth in times of universal deceit is a revolutionary act.”

                                                                                                   George Orwell

Commentary & Analysis

The Dollar and Oil May be Telling Us Gold is Toast

I’ve been surmising/guessing and attempting to validate a thematic JR and I developed about three or four months ago, initially shared with our Global Investor subscribers—the commodities super cycle is over. Is gold validating that view? I tend to think so.

My bias is leaking in here. We have been short gold for many months. Our initial target was 1,400. Now the question is: Will gold fall further? I say yes. Why? The US dollar is one reason.

Long-time readers of Currency Currents might remember that back in mid-2008 I said I expected the US dollar had bottomed thanks to the credit crunch, and said crunch was a sea change in the global macro environment–the catalyst for new multi-year bull market in the US dollar. I have a seven to ten year time frame when I say multi-year bull market. If I am right about that, the gold bull market may be toast for a while, and has the potential to go much lower from here based solely on the correlation below:

US Dollar Index versus Gold Monthly

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But there is more evidence staking up.

As you might know, one of my fundamental rationales for a bull market in the dollar has to do with rising US energy production, or the flip side, i.e. falling oil imports. If the oil analysts are correct, then increasing energy independence for the US economy will lead to lower cost energy. That may have a powerful positive self-feeding impact for the US economy for three reasons:

1. It will likely reduce the US current account deficit, thus reducing the need for international funding of said gap; and

2. If energy prices do in fact fall, given the rising local supply, this should put a major dent in inflation expectations (a big driver for gold). Is there a more powerful real economy price driver than energy?

3. Foreign direct investment will flow into the US as international companies set up manufacturing bases so they can take advantage of cheaper energy.

And if we go to the chart we see something very interesting, at least it is interesting to me, and maybe to you.

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Summary: What is the validation to my guess gold may be toast for a while and goes a lot lower: 1) A stronger US dollar 2) Increasing US energy independence

Together they will help reduce inflation expectations in a self-reinforcing manner.

I am sure this isn’t something you are going to hear on your local irritating “buy gold” radio advertisement. But I do think it makes a whole lot of sense.

Jack Crooks Black Swan Capital