By Yves Lamoureux
We have not lost our enthusiasm for hard assets. In fact, in a bit of an interesting twist, we expect to see lower gold and higher oil prices in the short term.
As a result, we recently revised down our gold target to $1,000. Our original forecast was made on February 11th, and we felt at the time that $1,450 was in reach. Was this the bottom? After review we decided against it.
A declining dollar
The US dollar is, to us, at the start of a new decline, and we think that will help all commodities except gold in the short term. Our aim has been to show that gold has dissociated itself from the greenback. For many years the US dollar went sideways while, at the same time, gold saw an exceptional rise.
We are believers of correlations and thought that gold was way ahead of itself. We happily view this pullback as restoring some sense of historical correlation.
Today the battle might not be over for gold.
As the market appeared to view quantitative easing as the driver of gold came rising rates. We do not think rates have finished moving higher. We view our forecast of rates as perfect so far. We predicted rates both ways, first to 2.5% then to 4% on long bonds.
Viewed in this light, is this negative to gold?
We do not think so! It is for gold a new phenomenon to adjust to. Our favorite metric is to look at the 10-year minus the 2-year bonds. This spread has been contained within a band since the 1980, and we have felt very strongly for some time that the upper band would be broken to the upside.
This will in fact signal to gold the start of a new race.
We are also believers in Peak Gold. Our studies lead us to think that gold production will drop by half over a very long period. Think of supply demand as the real driver in the equation. Sprinkle a bit more US dollar devaluation and you have the making of a long-term bull market.
What sets apart our work from most is perhaps our understanding of these long-term trends. We are of the opinion that interest rates have begun a long-term journey higher that will be measured in decades. It associates well with hard assets.
The market will continue to shake out short-term players as it has always done. We look to turn to the buy side of gold once again as we seek a bottom. We have avoided gold this year, but don't let that fool you to what our long-term view really is.
Yves Lamoureux is president of Lamoureux & Company, a market advisory firm based on behavioral economics.