Gold Prices: Why You Shouldn’t Expect $1,000 Gold Anytime Soon

Since I last suggested gold looked “toppy,” our projected government budget deficit ballooned to $1.75 billion. The Fed decided to print money non-stop to fund a $1.15 trillion asset purchase program. Economic upheaval continued, including several major bankruptcies. Political unrest erupted in Iran. And North Korea stepped up its nuclear defiance.

All should have emboldened gold prices. And yet, the metal struggled to tread water. It’s actually down 2% since February.

Of course, the roar from gold bugs remains uninterrupted. They consider it heresy to suggest commodities correct, especially their supreme yellow leader. But they do. And I’m here to warn you to expect a correction in the short term for gold.

Four Reasons Gold Prices Are Headed for a Correction

Forget $1,000. The price of gold will hit $800 first. And here are the most compelling reasons why…

1. The technical indicators point to a pullback.

On Monday, gold hit its lowest price in five weeks. Ever since hitting $1,033.90 last March, it has struggled to gain momentum. While I’ll concede the long-term trend remains bullish, the short-term charts clearly point to a pullback. Most commodities experts agree that support rests around the $915 level. We’re perilously close now. If we break through that price, look out below.

2. Seasonality - the tendency for prices to strengthen or weaken throughout the year - bodes poorly for gold.

Historically, gold prices weaken the most in June and July. (They tend to spike in late September as demand for jewelry picks up ahead of the October-November festival and wedding season in India.) This week’s sell off could be the beginning of the traditional summer swoon. Now, gold bugs will refute seasonality this go round by asserting we’re not living in “normal” times. Thus, we’re not headed for a “normal” summer. That’s nonsense. The market is littered with poorer souls that invested based on the mantra, “It will be different this time.”

3. The primary catalyst to invest in gold - to hedge against inflation - is lacking.

We’re not anywhere near an inflationary environment. Instead, we’re staring down deflation. Case in point: The latest consumer price index (CPI) and produce price index (PPI) readings came in sharply lower than forecasts. In fact, CPI dropped 1.3% in the last year through May, the largest drop in 59 years. Gold won’t make any meaningful and lasting moves higher until inflation rears its ugly head again. Although inevitable, it could be a year or two before that happens.

4. Speculation and sentiment remain at fever-pitch levels.

Market-leading hedge fund managers remain heavily over-weighted to gold. The taxicab drivers of Wall Street - insurance companies - are even getting into the game. This month, Northwestern Mutual Life Insurance Co. announced a $400 million stake in gold, its first ever in 52 years. In perhaps the biggest sign of a top, though, Germany plans to unveil gold vending machines in airports and train stations. Bottom line, when everyone piles into one side of a trade, we know what happens. The market moves in the opposite direction.

Gold Prices: The Smart Money is Already Bracing for a Pullback

Please realize all we need for a gold price correction to materialize is a slight shift in sentiment… from wildly bullish to positive, not to neutral or negative. And the latest evidence suggests that shift could be upon us.

In the last week, the total volume of U.S. gold futures and options fell 3.6%, according to the U.S. Commodities Futures Trading Commission. Hedge funds and large institutional speculators hit reverse even faster, with “net long” positions dropping 9%.

Of course, retail investors - always late to a reversal - are clueless. The SPDR Gold Shares ETF (GLD) - the largest gold-holding trust fund and most common gold investment for us working stiffs - ended last week unchanged, holding 1,132 tonnes.

I urge you not to be as foolish.

Remember, no investment goes straight up and no investment goes straight down. When it comes to gold, sharp and violent corrections are typical. I’m convinced another reversal is afoot.

To profit from it, consider taking a small stake in the PowerShares DB Double Short Gold ETN (DZZ). It will provide you with 200% the inverse move in gold prices.

Now, if you’re too chicken to be contrarian, or remain an unrepentant gold bug, that’s fine. Just hold off on adding to your gold stockpiles. A better buying opportunity is coming.

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