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The Daily Reckoning

Gold prices will sink, but just enough to shake off its skeptics

Gold prices are up 33 percent this year, and it may be worth more than $2,000 by the end of the year. But gold prices will likely fall, at least for a little while.

By Guest blogger / August 25, 2011

Gold bars are displayed during a photo opportunity at the Ginza Tanaka store in Tokyo, in this file picture. Gold has risen a substantial amount in value this year, but it may have gotten ahead of itself.

Yuriko Nakao / Reuters / File

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Listen up, dear reader….herein we announce an historic Daily Reckoning forecast.

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Here’s your north star…your compass….your GPS to the future. Print it out. Paste it to your refrigerator.

About the turn of the century, two markets turned
Gold turned up
Stocks turned down
These major trends will end
Whence they meet

There you have it. Two markets diverged in a lonely wood. And that has made all the difference! Stocks went up 332 points on the Dow yesterday. But so what? It’s just a bounce. Noise. Or misinformation put out by Mr. Market, intended to trap unwary investors.

Our view is that the bear market began in January 2000. The feds fought it off with two huge extravaganzas of spending — the first beginning in 2001…the other after 2008.

Stimulus does wonders for stock prices…but it no longer works for the economy that sustains them. For every dollar that the Fed has put to work to fight the crisis since 2008, for example, it has produced only 80 cents worth of GDP. It didn’t work.

Fighting a credit contraction with more credit is a losing proposition. Eventually, investors are bound to realize that stocks are headed down. Eventually the bear market will resume. And eventually it will come to an end.

But when?

Our guess is that it will end when the Dow and the price of gold arrive at the same point — probably around $3,000. Whatever the number, you’ll be able to buy the entire group of Dow stocks for the price of one ounce of gold.

Of course, our view is a minority one. Warren Buffett doesn’t buy it. Most investors don’t buy it. We don’t even suggest that you buy it, dear reader. Just remember it. If it turns out as expected, we want to be able to say ‘We told you so.’

And if it doesn’t work out? Please have the grace to forget we mentioned it.

We would like to be able to predict the future, but we’ve never gotten the hang of it. We’re just guessing.

But since we’re just guessing, we don’t see why we should hold back.

We’re also guessing that…

…the weight of so much debt is depressing growth…and will soon depress stock prices too…

…that the economy is becoming zombified from too much government money…especially the military…

…that Mr. Market is ready for a long bear market anyhow; he’s tanned, rested, and ready to go to work

…that the US is following in Japan’s footsteps…towards a long period of on-again, off-again recession

…that the recession of ’08-’09 in the US never actually ended…

…and that stocks will go down over the next 5-10 years until they finally hit a real bottom.

But wait. Here comes the San Francisco Fed. Can you believe it? It agrees with us. Bloomberg reports:

Aging baby boomers may hold down US stock values for the next two decades as they sell their investments to finance retirement, according to researchers from the Federal Reserve Bank of San Francisco.

Americans born between 1946 and 1964 are beginning to retire as the US stock market is still recovering from the financial crisis that began in 2007 with the collapse of the subprime-mortgage market. The timing is “disconcerting” and, since stock prices have been closely tied to demographic trends in the past half century, “portends poorly for equity values,” adviser Zheng Liu and researcher Mark Spiegel wrote in a paper released by the bank today.

The equity-price-to-earnings ratio of US stocks tripled from 1981 to 2000 as baby boomers reached their peak working ages, and has declined since then, according to Spiegel and Liu.

Overseas investors’ demand for US stocks might help mitigate the effect of a baby-boomers’ sell-off, yet the impact would probably be limited, they said.