Gold prices have tumbled 20 percent from their August 2011 record highs above $1,900 an ounce. The precious metal closed down more than 1% Tuesday to $1,548.70 after rating agency Egan-Jones downgraded Spanish debt and investors flocked from the Eurozone credit crisis to U.S. Treasuries, pushing up the U.S. dollar.
Gold is down nearly 7% in May, which is the worst monthly performance so far in this year. May also marks the fourth month of declines in gold and the longest stretch of losses since January 2000, reports CNBC.
Gold's lackluster performance is somewhat surprising given the downright dreadful fiscal environment in Europe and the U.S.. Gold prices peaked last year at a time when the world watched the U.S. Congress almost default on the country's debt. The debacle then led to S&P stripping the U.S. of its triple-A rating.
Gold's fall has prompted some investors to question its 'safe haven' status.
As of May 15, speculators' long position on gold hit the lowest level since Jan. 2009, The WSJ reports, citing weekly data from the U.S. Commodity Futures Trading Commission
But Michael Pento, president of Pento Portfolio Strategies, is more confident in the price of gold than ever.
"Gold has performed spectacularly," Pento says in the accompanying video. "It has done exactly what I thought it would do."
In January, Pento wrote:
"The dollar price of gold may struggle in the first two quarters of 2012 as Euro weakness sends the dollar higher and commodity prices lower. However, a stubbornly high unemployment rate should bring Bernanke back into the QE game in the second half of this year. The likelihood of yet more dollar creation from the Fed, a continuation of negative real interest rates and a national debt that is most likely to be monetized should send gold to at least $1,800 per ounce by year's end."
Thus far, he remains confident in his $1,800 per ounce prediction for the later part of the year.
For years, Pento has cautioned against the inflationary pressures caused by too much easing by global governments and central banks. "However, we now face a hiatus of monetary intervention and that has once again brought about the fear of deflation—which is the natural countervailing force to inflation," he writes in a recent commentary on the value of the dollar and gold mining shares.
Pento says gold is currently responding to the prospects of deflation as stimulus programs put forth by global central banks come to an end, including the Long-term Refinancing Operation (LTRO) which has already concluded in Europe and the coming end of the Federal Reserve's Operation Twist. There are currently no additional quantitative easing programs on the table, which has resulted in a pullback in asset prices, including gold, debt levels and money supply, he explains.
"You don't need deflation—a reduction in the outstanding supply of money—to have markets react to a decrease in the rate of money supply growth and to then anticipate the eventual deflation," he writes. "This is what has already happened to the gold mining sector."
Without giving away too much of his trade, Pento tells The Daily Ticker's Aaron Task that Pento Portfolio Strategies has just taken a big stake in Junior Gold Miners (GDXJ).
At the current price, gold miners are cheap relative to gold prices, says Pento, who believes miners have already discounted "a severe dose of deflation" that prices gold between $850 and $900 per ounce.
But Pento does not see deflation, or the prospects of deflation, fully playing out. Before the end of 2012, Pento believes the global economy will continue to slow (see: China, India, Brazil) and there will be another round of stimulus by global central bankers. In the U.S. he predicts a rise in unemployment to 9%, spurring the Federal Reserve to embark upon another round of quantitative easing that will cause asset prices and gold prices to rise.
"Just as oil and equity values declined in 2008, in the anticipation of a much stronger dollar, the gold mining shares have now retreated to a level that forebodes massive sovereign defaults in Europe, Japan and quite possibly even in the U.S.," he writes. "Since a deflationary depression and a tremendous reduction in gold prices have already been priced into gold stocks, the odds strongly favor a rally at this juncture."
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