Gold peaked at $1,895 an ounce Sept. 5, 2011, and it has been trending lower since. Its high for 2012 was set Oct. 3 at $1,791.75. From that near-term peak it immediately rolled over to a near-term low of $1,683.50 one month later. It then rebounded again after the re-election of President Obama, to $1,750.50 on Nov. 26, before declining again to about $1,699 as I write.
What is most interesting about the performance of gold and the other precious metals over the course of the past year is that they have trended lower even as monetary stimulus or the expectations of stimulus have increased in all of the world's major economic centers -- the U.S., the European Union, Japan and China.
On Sept. 13, the Fed announced a new very large quantitative easing program, QE3, targeted at mortgage securities of $40 billion monthly indefinitely. Gold surged immediately on this news, moving from $1,733.25 to $1,775.50 the next day.
Since that announcement, there have been announcements or evidenced expectations of even more stimulus measures by the U.S., China, Japan and the EU to further counteract both domestic and export economic underperformance.
It appears that gold has been reflecting all of the anticipated monetary and fiscal stimulus that is likely to occur over the next few years as well as an expectation that it will not result in real inflation, which would warrant higher price levels.
Unless there is either a deflationary or inflationary shock somewhere in the world in 2013, it is likely that the hot money that has been driving gold will leave, and the next support levels are at roughly $1,500, $1,100 and $950.
The support level at $1,500 is weak, however, and if the price breaks that level, it is probable that the inertia of unwinding speculative positions -- by investors other than gold bugs -- will take it to about $1,100.
The 250% increase in price from the post 2008-09 crisis low of $712.50 on Nov. 24, 2008, corresponds to the massive global monetary stimulus measures that were implemented.
That run that peaked a little over a year ago, however, also reflected expectations that the stimulus would cause an increase in economic activity and money supply and result in real inflation that has not occurred anywhere in the world.
During the past year, the global economy and the world's largest economies have trended around very low to slightly negative growth. That means real inflation and economic activity have been well below the expectations that gold was priced for at its peak a year ago and still is at current prices.
Even if gold is to decline to the levels that prevailed just prior to the 2008 crisis, which I think is probable, it also probably represents a cyclical bear market within a secular bull market for gold and commodities.
Ultimately, gold is likely to reach the $4,000 level and perhaps higher as the current and future stimulus required does eventually cause an increase in economic activity, bank lending, money supply and inflation.