Something’s Gotta Give

It’s been a while since we looked at the price of Gold, so in the approaching festive season, let’s start with a game of, “Spot the Difference?”

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Answer….not a lot, when we compare the Dollar price of gold with the stock index of America’s finest, the S&P 500, since the post crash lows of late 2008/early 2009. So much for portfolio diversification, not that many worry about that when the trend is higher.

Ah you may say, that’s because the Dollar has been so weak, thanks to the currency debasement metered out by the Federal Reserve?

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One look at the second chart, which compares the price of the yellow metal in 5 major currencies, shows a similar picture. They all peaked back in September 2011, when $Gold hit $1920oz, then had a second stab in September 2012, since when they have all fallen away once more.

 

Although the gold bugs hate to hear it, gold isn’t really a hedge against inflation, even decades ago when the CPI data was genuine. Yes, in physical form and stored correctly, it is an insurance against Government theft, but as an investment against inflation history tells us that under a gold standard, gold rises during DE-flation and falls during IN-flations.  Likewise, in a free market, gold falls during a DE-flation and rises with IN-flation.

To understand the current environment you need to revisit the true definition of inflation, not the tripe bandied about by current policymakers.

As a final chart for our 2012 blog, we show a recent Wall St Journal comparison of $Gold against the XAU, an index of North American gold and silver stocks.

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Something has truly got to give here, so will it be the gold-mining stocks shooting higher to catch the metal, or a collapse in the metal price to meet the stocks. Stay tuned in 2013 and we will try to give a view.

May we take this opportunity of wishing you and your family a peaceful and happy festive season.

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2 responses to this post.

  1. Posted by Steve Carpenter on 21/12/2012 at 23:24

    Interesting article, one problem though, we are not on a gold standard and nor are we in a free market (it is soooo rigged BTW).

    Looking forward via the rear window is not going to help any of us this time…

    The issue now becomes at what point do all people of the planet collectively realise we are on Planet Ponzi and then jump out of Fiat into something else… most likely commodities of some sort.

    You have a great summary for the past, yet we have had only 40 years of the past running on Fiat currencies alone; I’d conjecture a lot of the problems we are about to see are unlikely to be appreciated fully by looking in the past.

    After all economics is mainly philosophy, give 63 million people in the UK each a £5 and you have no one single view of how its going to be used, yes you get clumping, but thats about all you can foretell.

    Oh and wasn’t it Mark Twain that said all you need for a mine is a guy standing next to a very deep hole? Yet if you have the stuff above ground and appropriately verified then you are as near as can be ‘to safe as houses’ when Planet Ponzi unwinds…

    Reply

    • Posted by Charlie Aitken on 22/12/2012 at 04:33

      Hi Steve….all very good points and certainly the policymakers are far more adverse to free markets since the debt crisis began…..the only points that I would add are that whereas collective social mood is usually logical in matters non-financial ( think buy one, get one free) it is not in matters financial ( the herd buys high and sells low ) and secondly, despite the enormous global stimuli since 2007, via QE,LTRO et al, the forces of a debt deflation dwarf it

      Reply

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