On Sept. 25, I posted “Gold on Hold; the New Play May Be in Munis”. In it, I referred back to my Sept. 19 comment that the price of gold might be vulnerable. The prices for GLD on 9/19 and 9/25 were $173 and $160 respectively. It’s now at $155, so those were both good calls, as was the optimism about municipal bonds. Whither the price of gold now?
Gold is back to the level it first hit in mid-July, when it set an all-time record and thus was decoupling from most commodities, which were already in a correction. Of course, gold is not a typical commodity; it is as “real” or alternative money that is its main use at these prices. But it also is torn out of the ground and thus is subject to supply-demand considerations. Put another way, if one thinks back to 1979-80, gold became overpriced relative to current and future monetary and price inflation, and so long-time buyers of gold even at $300 in that era missed the entire two-decade bull market in fiat. Put yet another way, on the upside, the price of gold has been well documented to move in a leveraged manner to the level of real interest rates. Thus, if the level of real interest rates (focusing on short-term T-bill rates) becomes less negative than expected, or even temporarily positive due to actual price deflation as in the deepest depths of the Great Recession, then gold’s price can move down in a leveraged fashion as well. Relative boom can turn to relative bust.
Noting the flat CPI for November in conjunction with a decline in industrial production (preliminary estimate), the almost flat recent monthly data from the MIT Billion Prices Project, the downtrend in all major commodity prices, the deceleration in so many economies globally, I’m on “deflation” watch. Thus, oversold bounces notwithstanding, I’m still cautious on gold for the months ahead. Between 2009 and 2010, gold went into a 9-month consolidation, repeating its action of earlier in the decade. It wore out the momentum players. Something similar may be occurring now. Yet lower lows threaten.
But though I may walk through the shadow of the valley of consolidation, I will fear no evil, because the Fed is with me. Its printing press comforts me. Surely inflation shall dog me most of the days of my life.
A stolid patience may be a special virtue in this environment, sticking to one’s core philosophy and core investment positions and not over-trading or over-reacting to the news du jour.