By Biiwii
Much more than CPI inflation needs to be considered with respect to the gold price
Yes folks, it’s the return of the two egg heads (Campbell Harvey and Claude Erb) who first put the scare into gold bugs back in 2013 with the research paper The Golden Dilemma (PDF), which found that as adjusted for CPI, gold was very over valued. Enter Mark Hulbert with the updated warning for inflation-centric gold bugs. Gold has no business being this expensive.
I have never understood who would want to be one of these “gold traders” (other than the miners with a need to hedge and bullion banks with a need to hedge and manipulate, ha ha ha). Why would you be a trader in an element that is a measure or barometer of other items and conditions? It don’t get it. I guess slick traders speculate with insurance policies, so why not gold too? Everything’s a play after all, in the casino.
To answer Hulbert’s points, beginning with the above…
Gold is over valued by this measure. But it is an inflation-centric view that got many gold bugs into trouble in the first place. What we have now is a deflationary environment against which global policy makers are inflating and manipulating their credit systems as a matter of routine. Witness gold vs. oil, copper, palladium and virtually all commodities that depend on inflationary economic growth spurts for their price appreciation. Gold is in a bull market vs. these items, and that does imply gold is over valued (vs. commodities) if one day the pendulum swings from ‘D‘ to ‘I‘. But right now, gold is retaining relative value in the deflationary backdrop.
Yet gold bulls’ argument isn’t as strong as it otherwise might appear. Because gold’s inflation-adjusted price remains well above its historical average, inflation would have to heat up by a whole lot more to justify gold’s current price, much less a higher one.
Yes Mark, but that is what silver is for. And maybe again one day, oil, copper, hogs, tin, etc. if policy makers actually get what they are trying to promote, which is an inflation problem. Commodities (the true ‘inflation trade’) are in the dumps because to the average market participant, there is no inflation right now, core or no core. And yet gold remains “over valued”.
I base this assertion on a National Bureau of Economic Research study a couple of years ago titled “The Golden Dilemma.” Its authors were Duke University professor Campbell Harvey and Claude Erb, a former commodities-fund manager at TCW Group.
Yes, we know.
The chart at the top of this column, which is an updated version of what Harvey and Erb present in their paper, plots the ratio of gold’s price to the Consumer Price Index, which gauges inflation. The chart dates back to the mid-1970s, which is when gold was allowed to be freely traded in the U.S. Notice that, even though this ratio has been declining in recent years, at 4.69-to-1, it remains well above its long-term average of 3.5-to-1.
It’s called a bear market (in nominal terms) as gold works off its over valuation vs. inflation signals (like CPI and/or core). But again, we are not dealing with inflation right now. We are dealing with this, a reflection of a persistent deflation that has been trying to take over the macro really, since 2001, but most intensively since 2005. First the BoJ, then Greenspan, and then Bernanke and a host of global policy moles (Whack-a-Moles #1, Draghi and #2, Kuroda have already popped their heads up in 2016) have taken license to inflate against this pressure.
The point is that gold is doing its job in the current environment right now in retaining relative value. If an ‘inflation trade’ finally gets going gold would decline vs. silver (I believe first and foremost) and eventually the usual suspects like oil, copper, etc. But at this time there is no inflation trade.
I get frustrated with these news blurb articles that try to make one linear point, when the actual picture is much more textured and complex. “Gold traders” are buying gold because of inflation? Only the dumb ass ones are, Mark.
The accompanying chart of the gold-inflation ratio actually presents an even bigger challenge to those who would use inflation to justify a higher gold price: The ratio is far from constant. It instead has fluctuated wildly from an all-time high of 8.7 (in January 1980) to a low of 1.47.
As you can see, I don’t. So let’s move on.
And that means inflation does a poor job of explaining gold’s fluctuations. Even if inflation were much, much higher than what the government is reporting, in other words, the bulls would still be on shaky ground in betting that it would lead to a higher gold price over the short, or even intermediate, term.
Sentence #1: Bingo Mark!
I’ve found that gold market sentiment does a much better job than inflation of explaining the metal’s shorter-term fluctuations. And, as I argued several weeks ago, sentiment does not currently exist for a sustainable gold rally.
Bingo again, Mark! I actually love your HGNSI columns.
So both sentiment as well as fundamentals suggest that current prices represent a high-risk time in which to invest in gold.
First off, are you talking trading (as above) or investing? Traders are and have been on a bounce in the metal and that is all it is, a bounce. But your “fundamentals” of inflation are a canard. Stop obsessing on that and stick to sentiment, which is your wheel house.
Here is the view of the ultimate sentiment indicator (from Sentimentrader.com), as used in NFTRH last weekend (mark up mine). It shows that commercial hedgers’ net short positions were increasing (line dropping) as of January 26, but were nowhere near the end of that trend to the lower end of the channel, which is actually an uptrend in net short covering by the smart money in this market. So the bounce by this and other indicators we use can continue in the short-term. One day when the net positions actually go positive, we will have the signal that was engaged at the start of the secular bull in 2000-2001.
But beyond the short-term the real macro fundamentals (which include much more than the god damned CPI) are steadily becoming more positive, but are not yet fully engaged. It’s just that inflation is low down on the list of things that need to come into place.
Though this graphic is more relevant to the gold mining sector than the actual metal, cue the Macrocosm so that we may continue to debunk the promotional, incomplete or just plain incorrect analysis flying around all over the internet. Look at how tiny planet ‘Overt Inflationary Effects’ is.
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