This is not a gold price forecast or even a soft prediction. This is simply something to keep a watchful eye on. A successful investor always keeps tabs on potential risks to his portfolio, and this is, of course, no different.
To summarize, the “positive” unemployment numbers are making the Fed and other investors change their outlook on the US economy at least a little. If the “good news” continues — and we highly are skeptical of this — then inflation will likely become a larger concern to the Fed than cheap credit, meaning they could increase interest rates.
Last time we had a decade-long mega bull market and the fed dramatically increased interest rates, the price of gold never fully recovered, and dropped nearly in half over the next year.
What Happened in 1979-1980 — Deja Vu?
Again, I’ll let my favorite investor and economist tell the tale:
“In 1979, Fed chief Paul Volcker took office as the dollar was headed down the tubes. Volcker decided to save the greenback by tightening monetary policy severely. This drove interest rates beyond 15%. Non-dollar assets crashed, and most were moribund for two decades.”
Is this going to happen? Honestly, there’s no idea. The Fed believes inflation is low, even though mainstream economists are reporting it around 8%. The Fed thinks printing money is the solution to almost all of our problems. The Fed believes that inflation is a good thing because that’s what’s “creating jobs” right now.
We know this is preposterous, but it’s still something to look out for.
What Could Happen Now
Gold is a highly speculative market right now. People buy it not because of income, but because of what they think is going to happen next. If suddenly people begin to believe in a recovery, that might not be great for gold. If people begin to no longer fear inflation because interest rates increase, then that certainly wouldn’t be great for gold.
Any strong correction could trigger some basic reflexivity, meaning gold prices could take a huge, huge drop. I’m not saying this will happen — I’m just warning investors to know what could possibly happen.
Remember, there’s a reason most gold price forecasts are wrong. This is more of an art than a science, and you shouldn’t trust forecasters anymore than voodoo chieftains in Zambodia.
If you want to learn more about what happened in 1979-1980, check out my article on why gold prices crashed.
If you want to learn more about how to prepare your portfolio so that you can walk away from a gold price crash relatively unscathed, then read about the fail-proof portfolio.
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