Mark Dow of the Behavioral Macro blog is out with a thoughtful post titled “Precious Metals. The Second Wave of the Bubble Unwind is Upon Us”.  Dow has been bearish on gold for the past couple of years, and he makes several astute points in his post. Here is a key excerpt:

“When I’m asked how far do I think gold can ultimately fall, my answer is I don’t know. I can only guess. The guess I’ve been working with is—as a minimum—a return to pre-crisis levels, based on the notion that the post-crisis investment theses have pretty much all turned out to have been wrong. (And, for the record, the statute of limitations on ‘not wrong, just early’ ran out a long time ago. By the time this is over only Peter Schiff, Zerohedge and Jim Grant will be waving their arms.)

On this basis a pre-crisis level would come out at somewhere around 700-750. Of course, bubble unwinds do overshoot, often by a lot. But the 700 area seems to me a reasonable, even conservative expectation, if the broader thesis is right.

Dow’s basic premise is that central bank QE actions have lost their psychological impact on the gold market, and a strong US dollar and rising interest rates will continue to be headwinds for gold to buck for the foreseeable future. This thesis makes a lot of sense and thus far it’s playing out accordingly.

However, something many precious metals bears don’t spend much time discussing is that the bearish metals thesis relies on QE continuing to work well in keeping financial markets propped up, asset price volatility low, and currencies in a relative balance. It is hedging the unknown – what might happen when markets don’t behave exactly according to central bank planning – that investors should own gold for.

We should also note that one of the best contrarian indicators during the past few years has been bloggers establishing bold downside price targets after large market declines. Time will tell if this is another example of this phenomenon…..