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Gold set to suffer a ‘deeper dive’ and drop another $200: Wells Fargo strategist

It's been a bruising week for gold prices, with the precious metal falling as low as $1,243 on Friday, for a 6 percent loss in a week's time — but John LaForge, the head of real asset strategy at Wells Fargo, thinks the worst is still ahead.

"Is the $60 drop in gold prices the beginning of a deeper dive? Our answer is yes, it may very well be," LaForge wrote in a Friday report. "The history of gold, and commodity super-cycles, says that gold may very well lose another $200/oz., testing the $1,050 level, before it is time to buy again."

LaForge explains that gold is "currently buried knee-deep inside a commodity bear super-cycle, which began in 2011."

According to this "super-cycle" theory, commodities tend to trend in the same direction for many years, and gold is one of these trending commodities that historically "has generally tracked past commodity super-cycles."

As an example, LaForge points to the abysmal performance of gold in the period from 1980 to 1999 — which set the stage for a stunning turnaround.

To explain these cyclical moves, the strategist turns to supply. As commodity prices rise, supply rises as well, but at a certain point, supply far exceeds demand.

Turning to gold specifically, he explains that enough gold has now been mined that were all the above-ground gold distributed equally among the earth's human inhabitants, each would receive 0.8 ounces of the precious metal — one of the highest such amounts since 1950.

"History tells us that gold must at least begin to shake some of this supply excess before prices can begin to rise for good again (a new bull cycle)," he explains.

So how far must gold prices fall in order to do that? LaForge says that gold won't be ripe for the buying until it hits $1,050, which he believes could happen as soon as 2017.

Such a drop would obviously be bad for the gold miners. And in fact, as gold prices dropped this week, the popular GDX gold miners ETF slipped 12 percent.

One trader and technical analyst, Todd Gordon, says it's high time to bet on more losses for the mining stocks. Turning to gold behemoth Newmont Mining, which was the S&P 500's best 2016 up until recently, Gordon is putting on a trade that aims to "take advantage" of gold prices "trying to pull Newmont lower."

Friday on CNBC's "Trading Nation," Gordon recommended buying a 33/31.5 put spread expiring on October 28 for about $0.50 per share. If the now-$34 stock closes below $31.50 in three weeks' time, this spread will be worth $1.50, meaning that the trader's money will be tripled. On the other hand, if Newmont stays above $33, the entire cost of the trade will be lost.


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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Brian Sullivan

Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

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