The usually terrific Floyd Norris puts forth an interesting but somewhat flawed thesis in Friday’s NYT about Gold; it has some odd logical reasoning in it — that’s unusual for Norris, who is typically excellent:
"GOLD is in a bull market, approaching $500 an ounce for the first time since 1987, and there is talk that the move shows renewed fears about inflation. Gold bugs say it may be that people are starting to lose faith in central banks to preserve the value of paper currencies, while others see evidence of growing demand for gold jewelry as Asia grows richer.
But perhaps it shows something else entirely. For the last three years, since the world settled down from the technology stock boom and bust, gold has traded suspiciously like just another American stock. If the stock market goes up, so does gold. And ditto if the stock market goes down." (emphasis added)
I find this description to be incorrect. As the graphic from his column (below) reveals, Gold has been in a robust up trend since even before the reflation process began in 2002 — mark the beginning of the Gold move to 2001. The argument can be rationally made that the Gold market correctly anticipated the long term impact from high deficits.
Indeed, the very same factors that led to global markets to begin rallying since the pre-war period (March 2003) are many of the same elements which have led to Gold’s rally: They are both products of the massive government stimulus which took place following the crash and recession:
interest rates were dropped to half century lows;
deficit spending soared;
Personal income taxes were cut;
corporate dividend taxes were slashed;
Capital gains taxes were cut;
CapEx spending recieved a special accelerated depreciation (ADCS);
Spending for the prosecution of two wars;
Money supply increased dramatically;
Hence, why I called this the kitchen sink economy.
But the key takewaway is not that Gold and Stocks are suddenly in sync — the same underlying factors have been impacting each of them.
Stocks versus Gold
chart courtesy of NYT
Depending upon which time period you use, Gold has very much outperformed stocks. Equities have gone sideways, and have been rangebound. Recent Market returns really depend on the measuring period you employ. If you take your measure of the markets as just before the War began, that creates a period of strong performance. Measure the market over other periods — 1 , 2 or 4 years — and there’s not a whole lot of returns to write home about.
Here’s Norris’ take:
"Since the end of September 2002, as the stock market was hitting bottom, the S. & P. 500 is up 56 percent. But over the same period, the nearby gold future has risen 52 percent. Gold and stocks have not marched in lock step over that period, but neither have they moved very far apart.
The interesting question is why that should be, and whether it will continue. A possible explanation is that this is an era with an excess of capital available for investment. That explains low interest rates and rising prices for many investments, from stocks to gold. Since the end of September 2002, the major stock market indexes in the United States, Britain, Japan and Hong Kong, measured in dollars, are up 56 percent to 67 percent, none of them very far from the change in gold. The real proof of a bull market in gold will come when, or if, it resumes an ascent that is impressive not only when measured in paper currency, but also when measured against alternative investments.
Note that in the chart provided, Gold has gone through distinct periods relative to the SPX: Under-performing (1996-99), Over-performing (1999-2002)and Equal-performing (2003 – ).
My main problem for Floyd’s thesis is the end game for reflation: It has already morphed into inflation. This bodes well for Gold, but poorly for stocks.
UPDATE: December 1, 2005 6:58am
Our discussion of Gold (and then some) gets expounded and expanded upon in today’s WSJ:
What to Make of Gold’s $500 Run
To See How Gold Is Doing, Check the Rest of the Market
Off the Charts