As the gold price and gold mining sector continued to rise, debate has heated up over whether the price of gold has appreciated too rapidly and is set to reverse downward. Numerous investment banks, high-profile investors, and market commentators have recently weighed in on this topic. A report from Macquarie Equities Research highlights several fundamental factors that support the bullish case for the price of gold and gold mining stocks. Macquarie focuses on that fact that with near-zero short-term interest rates and slowly rising inflation figures, the level of real interest rates is again dropping below zero. Real U.S. T-bills, which reached 2.3% in August of 2009, are currently slightly above zero and according to Macquarie could reach -2.0% by January of 2010. Negative real interest rates have historically been very positive for the gold price, and the report predicts that the Federal Reserve will keep interest rates at or near current levels over the next 18-24 months. According to Ned Davis Research, when real T-bill yields are 0.2% or lower, gold has gained, on average, 22.4%.

Macquarie’s Macro Strategy team went on to write that the gold price is approaching the $1,200 to $1,500 per ounce range they identified earlier this year, and that while sentiment is getting “a little frothy”, they believe the price of gold will nonetheless move higher as bearish sentiment on the U.S. dollar shows no signs of abating. Further supporting the bullish cash on the gold price is that the market is moving into a seasonally strong period of the year for gold-related investments - and that while gold mining stocks have lagged the price of gold, they “could play catch up at any time.”

While the fundamentals underpinning the gold price and gold mining stocks remain very positive, a growing subset of investment professionals has been arguing that the fundamentals are already priced in at $1,145 per ounce. Well-known market pundit Robert Prechter, founder of Elliott Wave International, released a bearish report on the gold price in his latest Elliott Wave Theorist publication. He noted that in the past two days, 97% of futures traders report being bullish on the gold price. According to MBH Commodities, this is the highest two-day reading since the organization began keeping this data in 1987. Moreover, the only other time there was a 97% reading was for one day - March 3, 2008 - only two weeks and $30 prior to the gold price reaching its previous all-time high of $1,033 per ounce. Prechter also pointed out that the silver price is still below its March 2008 high of $21.40 per ounce, while 95% of futures traders are bullish on silver. Mr. Prechter argues that the record bullish sentiment readings with respect to the gold price and silver price, along with the divergence of the gold price reaching new highs and the silver price lagging behind, provide strong evidence that the gold price is close to a significant top.

In the latest edition of the Elliott Wave Theorist, Prechter also provided his view on the U.S. stock market, which he believes is close to completing an important topping process. He points out that while the “bluest of the blue chip markets in both the stock and commodity sectors - i.e. the Dow Jones Industrial Average and gold - made significant new highs,” numerous other sectors have remained below their October and/or September 2009 highs. Some of these sectors include the Russell 2000, a more speculative index than the Dow due to its inclusion of many small- and mid-cap names, and the Banking Index and REITs, two sectors crucial to an economic recovery. Prechter states that these types of divergences are “the most traditional of all technical conditions warning of distribution.”

While Mr. Prechter gained fame for calling the 1987 stock market crash, and turned bullish on stocks near the March 2009 lows, his track record is questionable when it comes to the gold price and gold mining stocks. Elliott Wave International has remained consistently bearish on the gold price for over a decade, only to see the gold sector continue to significantly outperform most other asset classes over this time. It remains to be seen if Prechter’s deflationary predictions of a rising U.S. dollar and a falling gold price will ring true moving forward.