A friend recently said to me, “No matter how you look at it, the gold price is going down to $450.00.” He argued that there’s simply no reason for the yellow metal to trade at $1,100 now.
He also added, “All the problems everyone was worried about are slowly diminishing and the precious metal is simply reacting to it.”
Here’s a little background: he’s a trader. He looks for opportunities on a short-term basis and rarely bothers holding any position for longer than one month.
Can the Gold Price Really Go Down to $450.00?
I disagree with my friend completely.
Here’s where I do agree with him; he may be right in the very short-term. The gold price may fall simply because momentum is towards the downside. But $450.00, and anything below $900.00 in my opinion, is an outright unrealistic target for gold.
If gold’s price actually goes to $900.00, the entire precious metal mining sector will go through significant scrutiny. Major mining companies like the Barrick Gold Corporation (NYSE/ABX) and Goldcorp Inc. (NYSE/GG) can’t even produce at that price. There will be a very sudden supply shock.
Factors Working in Favor of the Yellow Metal
You see, the so-called “problems” my friend talked about still remain. In fact, conditions, if you look closely, are much more fragile than they were before. Just a small hiccup can create significant problems.
Consider this; the recent decline in gold prices occurred after the fiasco in Greece “ended.” The stock market rallied, and the mainstream outlets told that everything was back to normal. Let’s be honest here; the can was just kicked down the road. Greece got a bailout. Not a debt haircut. A few days later, the International Monetary Fund (IMF) even came out and said that a debt haircut may be needed for the country.
Don’t be shocked if Greece makes it to headlines again very soon.
Mind you, we still have Spain and Italy that are spiraling in debt. Italian banks still have $214 billion worth of bad debt, and it’s been increasing. (Source: Reuters, July 8, 2015.)
Forget the eurozone. China is something to be worried about even more.
The Chinese stock market is crashing. The decline is currently halted by government interventions. When it ends, those who have been stuck will most likely want to sell. This isn’t all; bad debt in China remains a problem as well.
Will investors in China run towards the safety of gold when their losses accumulate? That remains to be seen.
Where’s Gold Going Next?
Right now, the only factor impacting the gold market is the Federal Reserve and its stubbornness towards raising rates. Investors are spooked by it and are selling as a result. Even those who were holding tight are getting a little nervous.
Dear reader, when it comes to gold, you have to think from a big-picture perspective and in the long-term.
The recent decline in the gold prices hasn’t changed my opinion. I continue to believe the precious metal is the next big trade in the making. Unlike my friend, I am targeting $2,000 an ounce as the price a few years down the road.
I believe this will happen because over the past few years, central banks and governments around the world haven’t really tackled the real problems. They have used solutions that are not sustainable in the long-run; sweeping problems under the rug. It’s only a matter of time until those problems resurface.