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“It is with our passions as it is with fire and water, they are good servants, but bad masters.”

Commentary & Analysis
INTERNAL STUDY: gold bugs actually cannot see the future.

I apologize, but when I think of gold bugs I have trouble not thinking of Mike Meyer’s performance as Goldmember in the third installment of the Austin Powers movies. To summarize with one quote:

“I love gooooooold.”

Yes, they do. It’s almost difficult to watch sometimes when a real gold bugger comes on TV to talk up the oh-so-precious metal. It’s almost as if the guy just got into an argument with his bullion for it not ever helping out around the house; but then the guy feels obligated to shower his gold with praises and compliments as a way to make up for being so blatantly inconsiderate (because, really — how is gold bullion supposed to help out around the house?)

Speaking of showering praises, did anyone get a whiff of Schiff this morning? Yeah, Peter Schiff – champion of the hard assets – put a potential target of $10,000 an ounce on gold. His reasoning: reckless money printing and the fact that there is no floor underneath the US dollar.

[Heavy sigh.]

Anyway, yesterday I came across an article linked to in a newsletter written by a gold analyst (bug?). The article offered up the idea gold will not be able to reach $2,000 per ounce unless we get an environment characterized by some form of QE3. In other words, we must see a struggling US economy needing support from the Fed, where US interest rates do not rise in order to see gold make notable gains in the second half of the year. From the article:

The commodities research team at Bank of America Merrill Lynch has been on the gold bandwagon since setting a $1,500 price target in 2008, but commodity strategist Francisco Blanch said Tuesday that the best gains are in the rearview mirror and a cyclical peak is likely in the cards as the U.S. interest rate cycle starts to change.

Speaking at BofA-Merrill’s mid-year outlook briefing in New York, Blanch said while a number of factors have contributed to gold’s astronomical advance over the past three years, one crucial element is likely to turn against the yellow metal. “Gold will struggle to push a lot higher as the real rate cycle changes,” Blanch said. “To get to $2,000 [an ounce] you would need QE3.”

They make a good point. And this is a similar forecast to what I laid out in my Tuesday (6/28) publication of Commodities Essential. Now getting back to the gold analyst who linked to the article on BoA/Merrill Lynch in his daily email comments, here is what he had to say about it:

It’s hard to believe that any knowledgeable person would fall for this sort of comment. I’ve been listening to this sort of talk every since gold hit $500 the ounce. This Francisco Blanch character is going to look real foolish when gold blasts through $1,800 an ounce later this year.

I thank reader ____ for this story. The commentary is mostly b.s. … but the picture sure is nice.

Three things:

First, yesterday marked the second consecutive day this particular analyst has alluded to the niceness of the gold photo accompanying an article. I think this proves my earlier point – they love gooooold. If it’s starting to sound awkward to you, that’s because it is.

Second, BoA/Merrill Lynch still expects a year-end price of $1,650 for gold. That’s $150 higher than the current price. It’s also only $150 lower than the price at which they will look “foolish” should it break. From what I gathered, BoA/Merrill Lynch said gold would not break $2,000 an ounce. But this particular gold analyst sure won’t come out and say he believes $2,000 is in the cards this year … or the first half of next year … or whatever. What a wimp. I bet he doesn’t even really love gold.

Third, the empty certainty kills me. Gold prices will “blast” through $1,800 an ounce, yet this particular analyst gives no reasons to how or why … or even hint at what might prove him wrong. His simple explanation is that the author of the Forbes article and the BoA/Merrill Lynch strategists are wrong because this argument has been used, and has “failed,” before. To wit, this particular analyst “cannot believe any knowledgeable person would fall for this,” and “the commentary is mostly b.s.” Of course, he thereby validates his own knowledge, undermines the validity of the article and any others who might concur with the article. I think this is something like lacking burden of proof, an ad hominem attack, a straw man, or all of the above, no?

Regardless of where this particular analyst actually does see gold reaching by year end, recent price action must be a little unnerving. Of course, this is just a buying opportunity, I’m sure.

Gold futures daily:

If I were to make a guess, rather than pretend I know what gold is going to do, I would think current momentum takes it down to support at $1,470. Then, after a short-lived bounce, the price will fall to roughly $1,440 within the next 2-3 weeks to test the long-term uptrend channel (red lines). Gold holding around this level would be hugely critical in maintaining the pace of its current uptrend.

Should I be somewhat accurate with that guess, then it’ll be rather difficult for gold to blast through $1,800 before the year is over. That would constitute a nearly $400 an ounce move in less than 6 months. All of the gold bugs’ wildest dreams (non-bug nightmares) would have to come true before something like that materializes.

There are several morals to this story:

  1. Watch out for further gold price declines in the near-term.
  2. Watch closely how gold behaves at the lower bound of its long-term uptrend channel, should it dip that far.
  3. If you’re not willing to stick your neck out on the line with a forecast, you might as well just cut off someone else’s.
  4. Based on my own findings, owning gold does not give you the ability to see the future, nor should it give you permission to pretend so.
  5. Don’t have a conversation, or share a bed, with your gold.

That’s it from me today. Have a Happy Independence Day! Have a nice long and enjoyable weekend. But if you’re looking for something to be depressed about this weekend, dwell on this comment from one of our readers yesterday:

World economies are coming to a grinding halt. Everyone will be brought to equity. What will you do with money when it is worthless? With wealth; gold, silver, diamonds, etc., when chaos is all around? Maybe fly to the moon?

Fire up those space ships.