Gold has been mauled this week as the commodity sank to a four-year low. But it may get a lot worse, according to economist Claude Erb, who said that his gold price forecast could see bullion tumble to $350 an ounce.
Erb deserves to have his opinion taken seriously, as he was among the only analysts predicting a long-term bear market for gold back in 2012. Rather than sit smugly by as gold lost $500.00 in value since his prediction, Erb has gone on the offensive this week and said it could get much, much worse.
He bases this prediction on two arguments.
The first is that gold is really worth about $825.00 per ounce, based on a formula he developed in a joint-publication in 2012 with Cambell Harvey, a Duke University finance professor.
The second is his prediction that when gold prices do begin to market-correct, downward momentum will plunge its value far lower; possibly as low as $350.00.
The possibility of a slingshot down past its real value is supported by historical data, because it happened in the mid-1970s and late 1990s. The difference is that with depressed oil markets, the Chinese stock crisis, and slumping growth in Europe, the stakes are higher than ever.
Erb explains the behavior of the gold market according to the five stages of grief: denial, anger, bargaining, depression, and acceptance. Gold supporters are apparently still in the bargaining phase, after denying its slow decline since mid-2012. Once the inevitable slide begins, depression and despair will infect markets until the acceptance stage takes effect and investors resign themselves to reality.
Still, Erb and Harvey’s research does contain a silver lining; gold tends to keep up with inflation historically. The bad news is that this price movement is measured in decades, and is altogether meaningless to short-term investors.
Erb asks why gold should behave any differently than other commodities that fluctuate wildly at times according to market forces. Its psychological reputation as a secure asset in the face of uncertainty does not protect the yellow metal from the realities of economic fundamentals.
Note that Erb does not explicitly state when this plunge will occur. It’s not inconsistent with his and Harvey’s research for gold to stage a massive price rally before beginning its slide.
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