End of the World for Gold Prices

"Tapering" can't fix a major addiction. You have to hit rock-bottom first...

 

BACK to our beat: the markets and our artificially juiced-up zombie economy, writes Bill Bonner in his Daily Reckoning.

 

Gold prices tumbled to a three-year low at the end of June. It fell 23% over the second quarter, the worst quarterly decline since today's gold market began in 1974.

 

"How low can it go?" asks the FT.

 

To about $1100 an ounce is our guess. Just a guess mind you. But that would be in keeping with the last big correction in a gold bull market – between 1974 and 1976. That experience tells us that gold prices can easily step back 50% in a bull market...then continue its upward surge.

 

"At the moment gold shares are not far off pricing in the end of the world," says Evy Hambro, Blackrock's go-to guy for yellow metal comments.

 

End of the world? Not quite. The end of the world can come at any time...and at any gold price. But we doubt that it will come in July 2013, not with the gold price at $1200 an ounce.

 

Just guessing...but the price of gold probably still has a ways down to go. Then it will go up. Because the things that made gold go up in the first place are still there. And they're not going away anytime soon.

 

For all the tapering talk, the feds have created an economy that can't be sustained. Because it requires bigger and bigger inputs of cash and credit. Everyone knows this can't go on forever. That's why the Federal Reserve is talking about "tapering".

 

But a major addiction can't end with "tapering"; you have to hit bottom first.

 

There can be no recovery. The economic expansion of 1982-2007 was fueled by debt. It took greater and greater doses of debt to keep it moving ahead – from 150% of GDP in 1980 to 360% in 2007. But you cannot increase the dosage forever. And by 2007, the whole economy was getting the heebie-jeebies.

 

What did the authorities do? They stepped in with the only tool they've got: more debt. William McChesney Martin, Federal Reserve chairman under the Truman, Eisenhower, Kennedy, Johnson and Nixon administrations, used to say that the central bankers job was 'to take away the punchbowl' once in a while. Now, half a century later, the Fed pours in more gin.

 

One way or another, a credit-addicted economy must get the shakes.

 

"Nothing is normal," says John Williams of ShadowStats.com, "not the economy, not the financial system, not the financial markets and not the political system. The financial system still remains in the throes and aftershocks of the 2008 panic and near-systemic collapse, and from the ongoing responses to same by the Federal Reserve and federal government. Further panic is possible and hyperinflation remains inevitable."

 

We don't know if hyperinflation is inevitable. But panic is almost guaranteed. It's what happens when people realize that the neighbors have called the cops.

 

The party is over. There's a rush for the exit. And "end of the world" is back on the program.