End of the Quarter, End of the Government (For Now)

by JDH on October 5, 2013

At the end of 2012 a number of Buy High Sell Higher readers gave their predictions for 2013.  Our predictions for where the Dow and gold would end the third quarter of 2013 were, for the most part, completely wrong.

The Dow closed on September 30, 2013 at 15,130.  Our average prediction was for a close at 12,250, so we were all wildly pessimistic about this very narrow measure of the stock market.  The most optimistic amongst us, MetalMeister, predicted 13,750, so he’s the winner for this quarter.  I was about as pessimistic as the rest of you, predicting 12,000, so I wasn’t even close.

As for gold, we were equally wide of the mark.  Our average prediction was for a gold price of $1,800 per ounce.  Actual price: $1,328.  Not even close.  “Closest to the pin” was ChrisC’s prediction of $1,700, which for a winning prediction wasn’t that close either.  I predicted $1,800, so I wasn’t close either.

Why were we all so wrong, particularly since in the past we were very accurate?

Our predictions for 2010 were near perfect.  A year in advance we predicted that the price of gold would close at $1,418, and it actually closed at $1,420.70   That’s amazing.  We were quite accurate in our 2011 predictions as well.  And yet, here in 2013, we aren’t even close.  What’s changed?

My guess: government intervention in the form of money printing.  Over the last two years with “Quantitative Easing”, QE1, QE2, QE Forever, etc. we have an artificial economy.  The Fed loans money at effectively zero interest rates to the banks, and the money filters through to the stock market, which keeps prices high.  Since none of the money is filtering through to the real economy, we have no apparent inflation, so there is no perceived need to buy gold.

So, the stock market is up, and gold is down.

It would appear that there are no consequences to unlimited money printing.  The stock market will go up forever, gold is a barbarous relic, everyone has a job, health care is free, all is good.  Buy stocks on margin, double your money every month or two, and all is good.  The picture has remained unchanged for two years now, so perhaps it’s time we all acknowledge that the laws of physics no longer apply, and all will be good forever.

Not everyone agrees.  Many are warning that you can only blow up a balloon so far before it bursts.   The second before the balloon bursts everything looks fine, and it appears that you can inflate the balloon forever.  Until you can’t.

The only question for us today is not whether or not the balloon will burst.  It will.  The question is when?  Will we continue to “blow” for another day, week, month, quarter, year or decade?

I have no idea.

Will the U.S. government shut down be a blip, or the the start of the crash?  I am of the view that it will be a blip, but who knows?  It would appear that both sides are very firmly entrenched in their positions, so there is no particular pressure on either side to settle.  Each side believes that the public will blame the other side, so it is to both side’s advantage to continue the shut down for a while longer, in the hope that the other side will look even worse.

What a mess.

Perhaps this is the week the balloon will burst, but I doubt it.  I suspect we will be having this same discussion next week, and for many more weeks to come………