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GOLD COLLAPSE…Is It The Start of Something Big? – NovaGold Resources Inc. (USA) (NG), SPDR Gold Trust (ETF) (GLD), Kinross Gold Corporation (USA) (KGC)

In August 2011, a Gallup poll asked Americans what they thought would be the best long-term investment: 34% said gold, 17% said stocks.

It’s too early to declare a winner, but the early results are in. The SPDR Gold Trust (ETF) (NYSEMKT:GLD) is down 17% since the survey was taken. The S&P 500 is up 38%.

Gold has lost nearly one-fifth of its value this year alone, and more than 10% since Friday — the worst decline since the early 1980s, when the yellow metal began a two-decade slump. Whether the current slide is the end of gold’s bull run, or just a short-term drop, no one knows. What is clear is that gold isn’t the wealth-preserver many thought it was. Some gold stocks, like NovaGold Resources Inc. (USA) (NYSEMKT:NG) and Kinross Gold Corporation (USA) (NYSE:KGC), have lost more than half their value in the last year.

It wasn’t supposed to work this way. The bullish argument behind gold made so much sense. As the Federal Reserve ballooned its balance sheet, inflation was sure to take off. And as the government ran trillion-dollar deficits, confidence in the dollar was sure to go up in smoke.

But neither happened.

The Consumer Price Index has increased at an average annual rate of 1.87% since 2008. That’s almost half the average level after World War II. Privately measured inflation gauges show roughly the same change. The vast majority of the new cash the Fed printed never really left the Fed at all, as banks kept it parked in excess reserves. And the federal budget deficit has been nearly cut in half as a percent of GDP. “It shocks people when I tell them the deficit as a percent of GDP is already close to being cut in half (this doesn’t seem to ever make headlines),” wrote economic blogger Bill McBride last week. It may be shocking the gold market, too. People still talk about “trillion-dollar deficits as far as the eye can see” without realizing that no such forecast exists. Government debt as a percent of GDP is on track to fall over the next decade

Then there are rumors that the Fed will cut its quantitative easing within a few months. “I expect we will meet the test for substantial improvement in the outlook for the labor market by this summer,” said San Francisco Fed president John Williams last week. “If that happens, we could start tapering our purchases then. If all goes as hoped, we could end the purchase program sometime late this year.” This would have been unthinkable just a month ago.

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