Gold Could Crash...Before It Doubles

Submitted by QTR's Fringe Finance

Markets have been volatile over the last several weeks, with selling pressure spreading across tech stocks and speculative assets. Gold and miners have been no exception, with the latter getting caught up in the broader liquidation and suffering significant selling pressure of their own.

While still beating the NASDAQ by about 6% over the last 3 months, miners are down -16.5% in the last month, plunging far more than the QQQ’s which are down just -5.75% in comparison.

I thought it would be a good time to take a few minutes this morning to explain that personally, this is precisely the type of environment I have been anticipating for years (gold and miners plunging alongside a risk selloff), and it does nothing to change my longer-term bullish outlook on gold and gold miners.

What we’re seeing is entirely consistent with the thesis I’ve been laying out over the last few years, though the thesis is far from being proven right.

For years, I’ve said that if we experience a genuine market crash, I expect gold to sell off alongside equities, and I expect gold miners to get hit even harder. The reason is simple: when markets begin deleveraging in earnest, investors don’t sell what they want to sell. They sell what they can sell.

Margin calls need to be met. Leverage needs to be reduced. Cash needs to be raised. And in that environment, even fundamentally attractive assets can get thrown overboard indiscriminately. Gold is not immune to this process, and gold miners, which are ultimately equities with operating leverage to the underlying commodity, are even more vulnerable…they’re easier to sell than physical bullion.

In my August piece, My Favorite Investment In The World Right Now, I wrote:

“During the first phase of a true liquidity crisis, nearly everything gets sold. Investors do not carefully distinguish between good inflation hedges and bad businesses while they are meeting margin calls or trying to raise cash. Gold can decline. Gold miners can decline even more.”

I went on to explain that miners could easily suffer drawdowns of 20%, 30% or more, even while the longer-term investment case remained intact.

And just days ago, in my market dashboard, I reiterated essentially the same point:

“My ideal scenario isn’t necessarily for miners to march straight higher from here. In fact, I wouldn’t be surprised if GDX got absolutely crushed during a broad market liquidation.”

The important part of my thesis has never been what happens during the initial liquidation. It’s what happens afterward. I’ve thought for a while that...(READ THIS FULL ARTICLE HERE).