PowerShares DB US Dollar Index Bullish (UUP), iShares Silver Trust (ETF) (SLV): Why Gold Will Continue Its Plunge

Have you been long gold or silver since 2008? If so, you might remember how long it took for quantitative easing, or QE, to sway these precious metals to the upside.

As the Federal Reserve created more money, you waited and waited for gold to move higher, unconsciously clenching your fists whenever you looked at the ticker, and frantically chasing fantasies of financial freedom in your mind. It was a logical investment, yet nothing transpired. Finally, after about one year, gold and silver gathered momentum, and acted as unstoppable freight trains for years — only to eventually smash into a steel wall.

Gold now remains a mystery to many people. But if you look at it from a logical perspective, it’s not difficult to figure out.

Upcoming gold and silver movement

Even if you’re long and strong SPDR Gold Trust (ETF) (NYSEMKT:GLD) or iShares Silver Trust (ETF) (NYSEMKT:SLV), take a moment to step outside the situation and look at it objectively.

The gold trade is more based on fear of upcoming events than actual economic catastrophe. People are confused about precious metals and their potential because they’re anticipating hyperinflation. But the Federal Reserve has been fighting against deflation, not inflation. In a deflationary environment, gold will decline along with almost everything else — including all commodities, stocks, real estate, gas prices, and food prices. At least the latter two are positives.

Since it’s only a matter of time before the effects of Federal Reserve monetary stimulus wear off, deflation is inevitable. Believe it or not, this is a good thing for the long-term economic picture. Most people want the economy to grow naturally and sustainably. All propping up of markets by artificial stimulus and speculation must come to an end in order to get to that point. As deflation becomes a reality, gold will continue to plunge.

Important points

Deflation is the key to gold’s downward movement, and that’s why it’s such an important point in this article. For anyone unfamiliar with deflation, it pertains to a decline in demand for goods and services.

Even if Ben Bernake sees the stock market getting hammered and opts to re-enter the game by announcing more stimulus measures, another important point must be considered. Many companies now cut their employees in order to increase profits, putting their cash toward stock buybacks and dividends instead of hiring. These companies are looking to take care of their shareholders, as opposed to their employees.