L: So Doug, gold has dropped from its $1,917.90 high last month down to $1,540 yesterday and is currently hovering around $1,650. I know you don’t believe $1,900 was the top, but is this correction good enough – are you buying again?
Doug: Well, I hate to recommend buying anything that’s gone up six or seven times in the last decade, but for all the reasons we’ve discussed in our recent conversations, as we exit the eye of the storm – first and foremost of which being the creation of trillions of new currency units – I am convinced gold is going much higher. So, yes, I do see the current correction as a buying opportunity.
L: In addition to the US roughly tripling its money supply in the last couple of years, the EU just announced taking its bailout fund to $2 trillion, so saying trillions is no exaggeration. But gold dropped about 20% in a month – that’s a pretty impressive correction.
Doug: It’s par for the course. Gold is a volatile commodity for the time being – although that will change when it’s reinstituted as money. If you think about what the word “correction” means, it suggests a price either dropping back when it gets too far ahead of itself or catching up when it gets unreasonably low. If you look at longer-term – multiyear – gold charts, the surge this summer looked like gold was going vertical. Hyperbolic curves are always danger signs. Gold has now reverted to the mean it’s established over the last decade.
That doesn’t mean it can’t go lower before heading higher, of course, but it does make this a much more reasonable time to buy than a month ago. The point to remember is that you don’t want to try to trade gold. You simply want to accumulate it, as an asset. Consistently, and in quantity.
L: But a line on a price chart doesn’t explain anything; it just shows us a result over time. Why do you think gold dropped in the face of exactly the sort of economic fear that should send it higher?
Doug: We saw this in 2008 as well; when the global markets get whacked – and they just got whacked hard – everything tends to dip, as various individuals and institutions are forced to sell whatever they can get a bid on to cover margin calls, redemptions, and such. As gold became more volatile, exchanges naturally raised margin requirements, which forced a lot of weak longs out of the market. Some people say it’s because some “bullion banks” are in a conspiracy to suppress the price of gold, but I find that reasoning ridiculous. No bank – no government even – can fight a decade-long secular bull market… entirely apart from the fact that most US and European banks are dead men walking. They’re bankrupt, and only seem alive because of massive government bailouts with newly printed paper money. Survival is the main thing on their minds now, not trying to suppress the price of some commodity they still believe is nothing more than a barbarous relic. And even if some group of fools was trying to drive down the price of gold, they’d only be giving the Chinese and the Indians a bargain as they buy more.