A website called Chart Facts
has an article on SeekingAlpha called Sell Gold, Buy Oil: The Numbers Are Clear.
While attempting to restrain some of the sarcastic tone I sometimes
exhibit, I would like to critique this article point for point.
"Gold has witnessed a meteoric rise over
the last 10 years. At $1,193 per troy ounce today, it is now up over
300% (15%/year) since the start of 2000. By comparison, the S&P 500
is down 24% over that same period. Oil is up over 170% (10%/year)."
A
secular change occurred in 2000. This new era has seen ever more
intense monetary policy being used as THE
primary economic fundamental underpinning; in other words, the age of
inflate-or-die is upon us as economies begin to wheeze and lock up in
the absence of liquidity that feeds them (as opposed to the productivity
traditional growth economies once used). As blog readers know, the
Copper-Gold ratio has been used to illustrate the inflate-or-die dynamic
as well as indicate a recent bearish divergence to asset markets.
"While gold may continue to trade up
for some period of time, history predicts that the when the gold run
ends, it will end badly. That is to say that the fall could be fast and
far. Since Nixon took the country off the gold standard in 1971, there
has been only one other gold rally on the order of the current one. It
began in Aug 1976 and peaked in Jan 1980. Gold increased over 700% in
less than three and one half years to $825. Unfortunately for those who
bought on the way up, gold proceeded to shed 64% of its value over the
next two and one half years. Worse, for those who thought “it will
come back,” it took almost 28 years for gold to eclipse its Jan 1980
high in Dec 2007. On an inflation adjusted basis, even the enormous
recent run has only brought gold back to just over half of its Jan 1980
peak."
Thank you
Paul Volcker. Anybody see any policy makers out there with Volcker's
combination of guts and available policy tools? Articles that implore
you to beware the 'gold bubble' (which has not even gotten started yet, I
might add) often highlight how badly gold underperformed in the 20 year
post-Volcker period during which Alan Greenspan, the financial services
leviathan, and an overall ethic of greed sucked the life out of the
wellspring of financial resources the former Fed chairman had injected
directly into the productive economy thanks to his stern monetary policy
and resulting rates of interest.
Yes gold under-performed as I
suppose, it should have. But the gold-bearish articles always seem to
ignore the other side of the coin; it has a lot of catching up to do,
still, at $1100+ an ounce.
"So,
how does one determine when the end of the current gold bull market is
near? No one knows. Many are buying gold as a hedge against
anticipated inflation. But, inflation is nowhere near where it was in
the late 1970s. Specifically, on an unadjusted basis, year-over-year
inflation in April was 2.2%. That was largely in line with an average
reading over the last 25 years and a long way below 8% to 14% readings
being registered during gold’s last spike. While future inflation may be
in the cards, it would have to increase an awful lot from current
levels to justify the recent run in gold. And, it likely has an uphill
battle against high unemployment and a Fed that is at least saying the
right things."
Here comes the convolution; if inflation
were busting out (our monthly EMA 100 'line in the sand' on inflation
fears remains intact) this would indeed signal the coming of an era to
consider the potential of oil, industrial metals, agricultural
commodities and many other resources to keep up with, and perhaps in
some cases outperform, gold. Although, depending on what said
inflationary spike does to economic growth, that is no given.
The
current system operates on a series of liquidity draw-downs, which pump
life into the primary economic funding system; namely, confidence in
the US treasury market. Here is the chart I did months ago to
illustrate. It is updated to current status and shows that the 'line in
the sand' has held and funding may continue.
The monthly EMA 100 represents a continuum during which all crises have
been met with debt-fueled funding. The problem since 2000 has been
illustrated well by various ratio charts often posted here; things like
the Dow-Gold and Copper-Gold ratios have shown clearly that growth over
the last decade has been hugely dependent on monetary policy born of
debt creation (monetary policy to which gold is very sensitive) vs.
productivity.
I agree with 'Chart Facts' that inflation has been
muted, at least its effects
(that's important) have thus far been so. But this is an era of
'deflation impulse always met by inflation policy'. Look at how poorly
oil performed vs. gold during the first real deflationary episode of the
'inflate-or-die' era. So yes, I am in agreement that inflation is
muted (from the perspective of its 'effects'), which is precisely the
environment for gold as policy makers will feel ever-more empowered to
meet economic contraction with new inflationary policies after being
given the green light by the Treasury market; you see?
"Maybe the better question to ask
about gold is whether, given its performance, there are better
investments at the moment. On the corporate side, an ounce of gold will
again buy the S&P 500. Before the recent run, that had not been
the case since Feb 1991. And, with corporate earnings after tax (also
plotted on the chart below) showing recent traction, there are good
reasons to believe that the S&P is not overvalued. Addressing the
inflation concern, stocks generally provide a good inflation hedge over
the long-term. The risk right now, however, is that the European
issues could put pressure on the corporate earnings which support the
S&P."
I saw this advice at gold 350, gold 420, gold
600 and so on and so forth. Here's the SPX-Gold ratio from well before
stocks topped out in secular fashion in ratio to gold. The nominal
price of gold is shown as well. All the way up we have seen this type
of analysis by gold bears. Gold has made up a significant portion of
the value gap, but in light of the inflation policy baked into the
system (and reflected by $Trillions in unpayable – save for devaluation –
debt) and considering that secular trends often run around 20 years
(just like the previous one in paper assets), there is a long way
further to go in gold's outperformance vs. the broad stock market.
As for corporate earnings "showing recent traction", I think it is
better to be forward-looking, don't you? Copper, oil, China… the
tools of the inflationary growth trade beg to differ with this analysis.
"Taking it all the way down to the consumer
level, an ounce of gold will currently buy you about one year’s worth
of gasoline here in the US. Specifically, it will purchase almost 430
gallons at Monday's $2.86/gallon. With data available back to the early
1990s, that had not happened prior to the last two years. A very
quick, very informal survey of non-money managers who live near me
failed to turn up any people who found an ounce of gold more valuable
than one year’s worth of gas for their cars."
The very
same money managers who did not see the 2008 crash coming despite at
least four years of clues. Next…
"Translating that to oil, a commodity easier to invest in than
retail gasoline, an ounce of gold will currently purchase 17.1 barrels
of crude oil (Cushing, OK). Since the start of 2000, that number has
averaged 10.8. (Interestingly, it average 18.6 from 1983 to 2000, but
that was before China and others made themselves felt as growing global
consumers of oil.) More importantly, oil is a key consumable of the
growing global economy. Unlike gold, it is easy to point to fundamental
economic activities that are likely to continue to drive demand and
price for oil up regardless of market vagaries."
If there is real and
sustained economic growth you are right sir, gold will underperform; as
it should. Is there real and sustained economic growth? Again, see
China, see copper, see oil (all of which will rebound and decline within
an overall deceleration of economic activity before the next
inflationary growth spurt.
"One
strange correlation that has crept up in the last 15 years that might
continue to support gold prices is the relationship between the
direction of gold prices and the direction of US debt to GDP. US debt
to GDP peaked in 1995-1996. When it began to turn down after that, gold
prices headed down as well. When debt to GDP bottomed in 2001 and
began to trend back up, gold turned as well. Both have been on a steady
march up since then. Unfortunately, the Obama 2011 budget has debt to
GDP steadily increasing over each of the next 10 years.
Nonetheless, with a growing global economy
and current relative prices, oil is likely to be a better returning
investment over the medium to long-term."
A lucid and
sane paragraph is followed by more convolution. A "growing global
economy" owing to $Trillions in unpayable – short of default/devaluation
– debt will contribute to the sustainable economic growth that things
like oil, industrial metals and the stock market will need to outperform
gold?
I have heard this all before; at 350, 420, 600…
biiwii.com
biiwii.blogspot.com
Notes From the
Rabbit Hole
