The Financial Times is out with “reporting” titled Investors beware gold’s deceptive beauty. It suggests that some guys who stole a few million dollars worth of gold rush-era gold from a California courthouse this week have picked a top. By which the article makes clear, said proposed top is not a mere trading top but rather something more major.
Is the quintessential establishment financial rag correct?
I suspect not. Here’s my reasoning
Gold was down 2% today in New York trading on the heels of a better-than-expected BLS Employment Survey and a good ISM non-manufacturing diffusion number. Now, in normal times, economic strength is viewed as inflationary if the Fed is not in a tightening mode, and this strength is thus gold-friendly. Nowadays, though, carts are often put before horses, and the ”reasoning” goes something like this: the economy is too good to merit QE 3, therefore the Fed won’t print, therefore it’s time to sell gold. That may be the “reasoning”, but I put the word in quotes because all pros know that there was no quantitative easing program when gold quadrupled between 2001 and early 2008. So I think today’s move was profit-taking after a sharp up-move. Whether there’s more to come is not my interest; these comments are directed toward the months and years ahead.
Since being formally and temporarily (LOL) delinked from the dollar by Richard Nixon in August 1971, gold has, with rare exceptions, trended in the direction of interest rates minus inflation. Pick your correlation between CPI inflation and T-bills, 2-year notes, or the 10-year benchmark note. it comes out fairly similar. This powerful metric screams “bull market” to me.
My cautions on gold bullion’s price in the past two months were severalfold, including:
One: the move above $1900 was both frenzied and “too far too fast” given that in the winter of 2011, gold had briefly dipped below $1300.
Two: by August, other metals were in downtrends.
Three: the relative weakness of gold stocks began to look predictive of an oncoming correction in the price of bullion.
Four: Europe looked to possibly be reprising the U.S. of 2008; meaning, price deflation could have been coming via Europe to the U.S.
Now, the frenzy is gone and indeed the FT is bearish; commodities downtrends have stabilized and are possibly reversing; gold stocks “tell” me nothing either way; Europe is printing, and the Fed is printing merrily with it enough to credibly “fight deflation”.
Gold went into a bear market after its wild 1979-80 run forced the Fed to prevent a hyperinflationary dollar collapse by letting interest rates go to whatever level was required to stanch the inflationary psychology and make unbacked paper money credible for the first time in U.S. history. In my view, the bear market ended when the 1980 highs were decisively taken out in late 2009. Then the bull market began after a couple of years of churning. From 2001 to about 2007 was more properly considered reversal of a bear market than a definitive fresh bull market.
In that context, gold is in a young bull market. It lagged the return from the best comparator, zero coupon Treasurys (the other form of long-duration money), badly last year. It might just be time to play catch-up, potentially with a vengeance.
Gold has risen about 20% per year for about the past decade. Given the Western world’s debt problems and much higher year-on-year price inflation rates than short-term rates in the eurozone (vs. ECB policy rate), the U.K. and the U.S., I see no reason that past will not be prologue. If that continues, then $3500/ounce gold four years from now is in the offing.
Do you know any other court houses that are storing Gold???