Published on Sep 14, 2016
By Will Ebiefung
Gold: Crash on the Horizon
Gold has had a significant bull run this year. However, I believe the evidence suggests the yellow metal is poised to experience a spectacular crash in the near future. Gold prices will be suppressed by unavoidable short-term macroeconomic factors, such as interest rates, the business cycle, and deflation.
Many macroeconomic forces are not a matter of "if" but "when". These include the business cycle and the interest rate cycle. The Fed will raise rates - this is unavoidable, and when this happens it will have adverse effects on the price of gold.
Gold is a commodity; this makes it an inherent hedge against inflation. This also makes it move inversely to the U.S dollar because dollars are the global reserve currency with which commodities are traded. Because of this unique relationship gold is at risk if the dollar index goes up.
Unfortunately for gold investors, an increase in the dollar index is almost certain. The Fed has made it clear that it plans to raise interest rates in the near future. An increase in interest rates is an increase in the intrinsic value of the dollar - something that is practically guaranteed to increase its value relative to other currencies.
Because the value of gold tends to move inversely with the dollar, an increase in the dollar means a decrease in the value of gold.
This issue is compounded by risks associated with the business cycle.
Image by Brett_Hondow / Pixabay
Again, this is not a matter of debate, but rather an economic law. Economies must go through cycles of expansion and contraction, and the United States has been in an expansionary period for over a decade. It will not last forever.
Recession is bad for gold because it, like interest rates, tends to increase the value of the dollar. The dollar is seen as a safe haven asset, and during economic downturns, investors 'flee to the safety,' of high-quality assets such as U.S. treasury debt (denominated in dollars) thus driving up the value of the currency, and decreasing the value of gold.
Recession also comes with deflation, more bad news for gold. In fact, out of all the risks facing gold, deflation is the most severe. Gold rallies with inflation and deflation is the opposite of inflation. It also slows economic activity and will rally the dollar more than any other factor.
Overall, gold is not a safe investment at this moment in time. The risks of holding the metal far outweigh the benefits. The macroeconomic risks associated with increasing interest rates, the business cycle, and deflation make gold an investment with more downside than upside. This is a good time to take profits or even short gold via ETFs like (
GLD), or (
GDX).
