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Why Gold Could Fall 50% from its Highs

By Dr. Steve Sjuggerud
Tuesday, January 13, 2009

Who's bearish on gold?

I dare you... Name one analyst who thinks gold could crash now.

What, you don't know any? That's what scares me... Everyone I know is bullish on gold... Everyone but my friend Jack Crooks.

I've mentioned Jack once or twice in DailyWealth as a true, successful contrarian. Over the summer, Jack was the only man I knew who was bullish on the U.S. dollar. He essentially said everything keeps getting worse, but the dollar has stopped going down, so it's bottomed. He nailed it. The Dollar Index soared from 72 when he wrote that to a peak around 88 a few months later.

 

He's at it again, this time on gold... with similar reasoning. Yesterday, he pointed out several circumstances that should cause gold to go up... but haven't lately:

How much more stimulus is possible to pump out and cheapen paper currency the world over? How much closer can we get to all out war in the Middle East? How much more dangerous can the Pakistan-India on-going quagmire become?

This is nasty stuff...Yet the supposed supreme safe haven – gold – continues to fade [fall] on all this stuff.

Jack says gold investors have gotten the exact circumstances they want for higher gold prices... and yet gold keeps falling. This is not a good sign.

Here's another ominous sign: Gold is breaking down.

In worse news for gold prices, gold broke below its key long-term moving averages. Jack points out that the recent highs have been lower and lower – another bad sign.

You may not put much faith in technical indicators like these. But some actually work...

I ran the numbers today. I use a 45-week moving average as a signal of general uptrends or downtrends (above the moving-average line is a bull market, below is a bear market).

Since late 1970, gold has risen at about 6% a year, compounded. But amazingly, when the price of gold is above its moving average, it compounds at a double-digit annualized rate. And when it is below the moving average, you lose money. That is a huge difference.

We at DailyWealth do believe gold is in a long-run bull market. But the near term could be difficult...

Gold jumped from $35 to $850 from January 1970 to January 1980. That sounds like a rip-roaring bear market. But did you know, from March 1974 to September 1975, the price of gold fell by half? We could see that again. We're already down about 20% from the highs... and nobody is even particularly worried yet.

Look, my friend Jack Crooks is good at what he does. Between Jack and the current downtrend, I wouldn't make big bets buying gold right at this moment.

In short... own gold for the long run. But don't take big risks speculating on it in the short run – it could cost you.

Good investing,

Steve

P.S. I've known Jack since we worked 15 feet away from each other at a firm specializing in international investing. That was more than a decade ago. I can tell you Jack is a smart, uncompromising currency trader who knows his financial history and knows the markets. You can click here to learn more about his work.




Market Notes


THE "CHEAP OIL TRADE" IS BACK ON...


It looks like you have another shot at the "gold/oil" trade we highlighted before Christmas...

On December 23, we checked in with the little-known gold/oil ratio. Both commodities respond similarly to inflationary pressures, so the ratio between an ounce of gold and a barrel of oil trades in a predictable range. That week, the ratio hit a historically high reading of 24... which meant oil was extremely cheap relative to gold. Crude rallied 35% in just two weeks from that oversold level.

As you can see from today's chart, the holiday oil rally "relieved" the stretched reading of 24 and pushed it down toward 18. On Monday, the rally gave back a big chunk of gains... and the ratio is again up to tradable levels around 22. This isn't a "bet the rent money" trade, but expect another sharp rally in crude.



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