Can Gold Continue to Glitter?

09/30/2013 7:00 am EST

Focus: COMMODITIES

Commodities expert John Stephenson shares three reasons why he thinks that the 12-year bull run in gold has now come to an end.

Commodities expert <strong>John Stephenson</strong> shares three reasons why he thinks that the 12-year bull run in gold has now come to an end.

HOWARD:  Can gold continue to glitter?  We’ll ask John Stephenson.  Hi John how are you?

JOHN:  Great Howard.

HOWARD:  John, you know as we’re recording this there has been a nice rally in gold.  As the stock market has sold off the dollar has slipped, gold has been rallying nicely through the late part of the summer.  Do you expect this to continue or what do you see for gold ahead?

JOHN:  I see gold going lower so enjoy it while it lasts _____.  I don’t see it going higher.

HOWARD:  Well how high do you think it can go?

JOHN:  Oh, maybe another $25 or so a share.

HOWARD:  Right now we’re in the $1300, you think it can go up to . . .

JOHN:  Right, $1350 tops sort of thing but then heading back down.  I think ultimately the long-term price for gold is around $1000 maybe $1050.

HOWARD:  $1000, wow.

JOHN:  So considerably lower then here.  The reason I say that is . . .

HOWARD:  That’s about almost 50% off its peak -

JOHN:  And that is virtually 50% off its peak, it’s had a great 12 year run, but I think it’s over, and I think it’s over for a few reasons.  If you look at what has historically moved gold there’s several thesis’s out there, most of them which have been either refuted or aren’t working for gold right now, one is U.S. dollar weakness, I think U.S. dollar is strong because I think clearly the U.S. economy is the biggest midget in the room or the cleanest shirt in the laundry, that thing it’s working and it’s turning out well.  Gold offers no yield so why would someone hold it if you do believe the U.S. economy has turned and I do believe that.

HOWARD:  And if there’s no inflation -

JOHN:  There’s no inflation, it tends to work as an inflation hedge, it works as a deflation hedge some people have argued, so clearly you don’t have either of those two things happening, at least in the major currencies of the world, and the major economies in the world.  Lastly what seems to drive gold is this fear indices and what I think really was the end for the gold rally was when Cypress was essentially blowing up and what happened for gold, really nothing, it went slightly down during that period of time and all these problems are still out there with the uncertainty the tail risk being the Euro zone, which I still think is a tail risk, which could derail the economy globally, but it isn’t coming to fruition now, and because it isn’t coming to fruition now it’s unlikely to come to fruition for some time.  They’ve been successful kicking the can down the road, I think gold goes lower, and the reason I say $1050 is essentially that is the marginal cost where the producers could get it out of the ground and make a modest profit.

HOWARD:  Wow, so I meant that’s  lot of people there’s still a lot of people I run into who still have very heavily weighted portfolios and precious metals, and I think it’s usually because of political fear.  Don’t they feel that the fed is going to have to print money sooner or later and the country is going to start falling apart and you’re going to want to have gold coins in your pocket to go buy gasoline or food or something like that?

JOHN:  Yeah and this is I think what one of the fundamental misunderstandings of exactly what is happening with quantitative easing, and this is why I think that argument just doesn’t hold water, the money printing argument.  What happens is when the fed is injecting money into the financial system, what it’s actually doing is buying securities from a financial institution and crediting that members account, crediting that reserve account, so unless they release those reserves by loaning to you and I, that money doesn’t get out in the system, so what we have is . . .

HOWARD:  So that would require a much stronger economy to do that?

JOHN:  And better credit.  And what you’re seeing is that the fastest growing group in terms of the credit, people getting available to credit is those over 680, with credit scores over 680.  Those are people who have god credit and actually the super credit, the people who really pretty much don’t need a loan to buy a house or anything else, those people the banks are throwing money at, but for the people who have weak credit they’re still not lending to.

HOWARD:  So the bottom line is there’s still a big gap between the amount of money that’s on the banks reserves and the amount that’s circulating in the economy.

JOHN:  That’s right, the financial health of the financial institutions is strong.

HOWARD:  Thank you very much.

JOHN:  You’re welcome.

HOWARD:  We’ve been speaking with John Stephenson on the MoneyShow.com video network.

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