By Henry To
Investors’ interest in gold peaked in September 2011, when it was generally agreed upon that the endless rounds of quantitative easing policies by the world’s central banks will result in rising inflationary pressures, while concerns over a potential Euro Zone break-up ran rampant, as government finances in countries such as Spain and Portugal became stretched as a result of various bank bailouts. All of these occurred while the U.S. government was running unprecedentedly high fiscal deficits, with little sight of budget tightening to come. Debt reduction through inflation was the mantra, and investors bid up gold prices to $1,900 an ounce as they bought in this narrative of rising inflation and monetary instability.
In retrospect, September 2011 marked the peak of the last gold bull market. Weighed down by its speculative (long) bets on the euro zone’s peripheral bonds as yields of Spanish, Italian, and Portuguese sovereign bonds rose, MF Global filed for bankruptcy the next month, but gold prices—and eventually, stock prices—took it in stride. 2012 came along; the euro zone and its monetary union stayed intact as the European Central Bank Chairman, Mario Draghi, vowed to do “whatever it takes to preserve the euro” that summer.
I subsequently became bearish on gold in January 2013 (see my January 25, 2013 global macroeconomic commentary), when gold traded at $1,660 an ounce. To recap, my reasons for turning bearish on gold prices were as follows: 1) the immediate danger of a euro zone breakup—which investors were genuinely worried about at the time—was passing, as Spain, Portugal, and Greece had just been bailed out by their richer euro zone peers, 2) U.S. economic growth was re-accelerating, and 3) gold prices were highly vulnerable to a major decline coming after a 12-year bull market. My 12- to 18-month price target for gold at the time was $1,100-$1,300 an ounce, a target which was reached just 5 months later.