Gold Bullion

Inflation appears to be still out there, yet Gold has been pulling back from its recent highs.

I was wondering about this (non) correlation when Prieur du Plessis sent me his most reecent commentary on the prior Gold Cycle.

Prieur notes:

"Analyzing the 1971 to 1980 gold bull market, price
data show that the first phase from 1971 to 1973 was largely on the back of a
weakening dollar, whereas the period from 1974 to 1978 saw increased investment
demand, with gold rising in all currencies.
 

It would appear that we are seeing similar action in
the gold market in the current cycle. Although we are all quite familiar with
the movements of the dollar gold price, the trend of gold expressed in other
currencies receives far less publicity. The following graph and table clearly
illustrate that, irrespective of its recent decline, bullion has been making
solid headway since the middle of 2005 in most major (and minor)
currencies."

We cannot draw any major "rhymes" from one prior cycle, but it is nevertheless an intriguing suggestion.

I have no idea whether Gold will follow its prior pattern. However, here is a broad overview of how it could possibly play out:
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click for larger chart
Gold_cycle

Its an interesting thesis . . .

>


Source:
Gold bullion: avoid or accumulate?
Prieur du Plessis
Investment Postcards, Mon 11 Jun 2007
http://investmentpostcards.wordpress.com/2007/06/11/bullion-avoid-or-accumulate/

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What's been said:

Discussions found on the web:
  1. michael schumacher commented on Jun 12

    BR-

    IS the reason that Gold is not rising is the threat of several ECB’s or ACB’s dumping supply into the market. I saw that Spain recently sold (i.e. dumped) 800 tons into open market to “help” out there continuing housing problems.

    Any idea’s

    Ciao
    MS

  2. Greg0658 commented on Jun 12

    Corn the new Gold.
    You can eat it and run your car on it.

  3. slapshot57 commented on Jun 12

    are the colors on the graph reversed? Why does the previous cycle halt in 76?

  4. Ross commented on Jun 12

    As a former mining and metals analyst in the 1970’s I well remember two distinct periods. The first was 1974 peak in gold copper etc. caused mainly by demand driver factors as well as the beginning of the inflationary spiral. We had a recession about that time and what was called stagflation. The run in the metals from say 1978 through 81 or so was simply inflation fear driven. Manias come and go. In my opinion, $3,000 gold is not out of the question but it could also see $400 before that. Spain sold gold for liquidity purposes. Seems they have a real estate problem. But again, gold is not money. We have a definite ‘western’ fractal money thought that is not shared with other cultures ie: oriental/indian/Russian. When we loose control, who knows what may happen.
    Land, gold, even black cows are commodities and should not be confused with credit money. But I agree, Greenspan was a serial bubble pumper. Gdp can also be defined as money X velocity or MV. If the V declines which it will Feds will try to ofset with an increase in M. Just an opinion but I suspect real inflation in the U.S. will top out at 15 to 25% within 8 years or so.

  5. super-anon commented on Jun 12

    Note how gold typically pulls back with the stock market. I think it’s been pumped up by easy money fueled speculation just like every other asset.

    When the liquidiy dries up I suspect there’ll be more than a handful of folks out there who have to sell gold to raise cash.

  6. Bill a.k.a. NO DooDahs commented on Jun 12

    The chart is incorrectly labeled. We have already passed the “speculative mania” phase 3 in this cycle, it happened a year ago. Sorry y’all missed it.

  7. John commented on Jun 12

    Barry,

    How can a “typical” cycle be defined based on a sample size of one (the 1971-80 period)?!?

  8. Aaron commented on Jun 12

    There’s apparently a gold/oil ratio with some historical precedent. I could just be reading the wrong websites, but the Googleability of the subject makes me think there’s something to it. If I had to choose between oil and gold, gold looks like the safer choice…

  9. Mike commented on Jun 12

    Another chart:
    http://www.bullandbearwise.com/GoldOverlayChart.asp

    Gold may not be “money” in the sense that it functions as a medium of exchange or a unit of account, but it has vastly outperformed fiat as a store of wealth over the last 5 years or so.

    I agree with the comments that Spain has pummeled the Price of Gold in the last month or two with their panic selling. I’d like to know who is on the other side of the trade sopping up all that gold… And you will probably see trend traders exit gold, taking it a bit lower if they get scared or have to make a margin call, but that’s great, I’m buying.

  10. Stuart commented on Jun 12

    Gold is a currency, period. full stop. Trades and is managed like any other currency by central authorities. period. full stop. Utterly amazing the ranks of brain dead who persist in grouping it in with other commodities is beyond ludricous, to the point of bearing outright sympathy for the proponents of such views. RBNZ the other day acknowledged they intervened, deliberately selling off their currency and buying dollars to stem the NZ dollars ascent. Japan manipulates its currency, the US manipulates its currency, China manipulates theirs, the stock market is managed/manipulated, but nnoooooooooo, the gold market is not manipulated. 1% understand. 99% are either complicit, naive or willfully ignorant on the subject of precious metals. It is above all other markets the most whoefully reported upon by any media source, the overwhelming majority of reports being nothing more than comic relief by those precious metal traders that understand the markets. The result, 99.99% of those discussing the gold market have little to no understanding of what they are talking about. Period. The only group that does is GATA, James Turk and a handful of others. With the mountain of debt to be funded, the amount of monetization required boggles minds and the dilution of currencies will send gold to the moon. Think about this. 1000 ozs of gold back in the 70s bought a house. The same 1000 ozs of gold now will buy a house. 100 bought a upper class car. 100ozs today will still buy an upper class car. It has retained its value. Paper currency has not, that’s why so many more are needed today. Medicare and old security by default means unreal amounts of currency dilution ahead. Got gold. You better have, lots of it.

  11. Fred commented on Jun 12

    I love comments like this. You wonder why they call them gold bugs.

    Why gold?…not platnum, or diamonds, or silver? Is this some “chariots of the God’s”, Aztec decree?

  12. Eddie commented on Jun 12

    Sorry, but that graph shows me nothing. I can’t figure out what it’s trying to say, but it looks like just a bunch of random scribbling.

    Just like oil and housing, gold is suffering from rampant speculation. Once that inevitably happens, we’ll see it back down, along with oil and housing.

  13. IM commented on Jun 12

    One has to be careful about assuming what played out in the past will play out again in regards to Gold. That being said, inflation and the devaluation of paper currency is most likely to drive gold prices higher.

  14. me commented on Jun 12

    “The result, 99.99% of those discussing the gold market have little to no understanding of what they are talking about. Period.”

    Substitute “anything” for “gold market”.

    China is supposedly buying gold.

    I noticed that when gold hit $700 the buying in India and Japan slowed, even as the holidays approached.

  15. Stuart commented on Jun 12

    Fred, ultimately your question comes down to what is money. Up until 1971, the dollar was nothng but a receipt, an IOU redeemable in gold as our currency was backed by gold. Now what is the dollar. A piece of paper for what, backed by what??? faith…faith in what??? A gold Roman coin, minted thousands of years ago still has value. Other than historical signifcance, the longest standing fiat currency still having value…is what. Rhetorical question… Money to be credible must have value and cannot be diluted at these rates of growth, 18 of 20 major currencies growing at double digits…c’,mon, think about that for a second. Double digit supply growth. Inflation is first and foremost a monetary phenoma. and is baked in the cake given the amount of debt that is coming due, monetary.

  16. MAS (San Diego) commented on Jun 12

    Is it true that the GOLD ETFs are taxed are double the rate of a standard ETF? And if so, doesn’t it make more sense to buy the Gold Miner ETF (GDX)?

  17. Bill a.k.a. NO DooDahs commented on Jun 12

    If the Dow were to go to 22,688 in the next eight months, we all know who would be yelling “parabolic” and “overvalued” and “speculative mania.” Interesting that 13,300 to 22,688 is the same percentage increase (70%) that gold had from September 2005 to May 2006.

    So Spain has been depressing the price of gold for the last two months? Hmm. What, pray tell, was keeping the price down for the previous eleven months? Could it be the weight of speculative excess?

    Somebody wants to talk about the inflation hedge chimera, rah, rah, “gold retains it’s value!” What did 1,000 ounces of gold buy in January of 1980? Let’s see, 1000 * 850ish = 850,000 in 1980 dollars. According to http://www.ofheo.gov/media/pdf/1q07hpi.pdf , the increase in housing prices (page 8) has been 249% since 1980, meaning that a $850,000 house in 1980s U.S.A. should be worth about $3 million. Today, 1,000 ounces of gold will still buy a nice house ($650,000), but it won’t buy a frickin’ mansion like it would in 1980. At September 1, 2005, just before the start of its parabolic run, 1,000 ounces of gold wouldn’t have even bought a median house in several areas of the country. Take the same dates and extrapolate for cars, et al, and you’ll get the point, if you have a brain.

    Like every other speculative instrument, gold is subject to excess and will go in and out of favor. It would behoove you gold bugs to recognize when it’s out of favor and behave accordingly.

  18. anderl commented on Jun 12

    And Native Americans traded clam shells with colonists to the point that colonists would prefer clams over silver for it’s dominance in the local market. There was an exchange rate for it and a North American network between the tribes with a “Federal Reserve” type tribe that lived in what is now New Jersey who’s sole export was the clam shells.

    Regardless of what you want to call a currency or commodity they are one in the same. If you go onto the Forex you will see most traders could care less about the subtle nuisances of its type. They would trade GBP against JPY, against Carbon, against, Oil, Against XOM if they could get an advantage of high reward and minimized risk.

    Calling Gold a currency or commodity is the sales pitch that gets the dumb sheep to buy or sell if. I bet if you call it a stock you can get them to trade that too… Oh wait… GLD the ETF. Even manure has a market to trade in

    The current markets see credit as a currency more so that the notes people put in their wallets. That credit is backed by a banks faith in your ability to pay the debt or if you are not worth enough you much provide your respective notes be deposited in an institution of which you can use for your transactions.

    We have all put faith in binary data lest you forget how your money is stored in your brokerage accounts. Anyone know of a company that pays in gold bullion instead of direct deposit?

  19. Stuart commented on Jun 12

    “Somebody wants to talk about the inflation hedge chimera, rah, rah, “gold retains it’s value!” What did 1,000 ounces of gold buy in January of 1980? Let’s see, 1000 * 850ish = 850,000 in 1980 dollars. According to http://www.ofheo.gov/media/pdf/1q07hpi.pdf , the increase in housing prices (page 8) has been 249% since 1980, meaning that a $850,000 house in 1980s U.S.A. should be worth about $3 million. Today, 1,000 ounces of gold will still buy a nice house ($650,000), but it won’t buy a frickin’ mansion like it would in 1980. At September 1, 2005, just before the start of its parabolic run, 1,000 ounces of gold wouldn’t have even bought a median house in several areas of the country. ”

    That has to be amongst the most useless and selective dribbles ever put to comment, not worthy of a comic book. Gold started out in the early 70s @ $35/oz. So do NOT compare at the height of its run up in 1980. That is clearly way too overtly blatant. Tell you what, I’ll make it easy for you. Pick 1971, 1972, 1973, 1974 etc..In fact, I’ll make it easier. Pick the middle of the decade, say… 1975 when gold was around $175/oz to make it easy. Take the same dates and extrapolate for cars, et al, and you’ll get the point, if you have a brain.

  20. Ross commented on Jun 12

    Stuart, I assume you are of Scottish ancestry. When you open your purse, do moths fly out. That explains it! Gold is truely a barbaric relic. One that I happen to favor for now. I’ve a good friend that still has some early 1980’s $800 gold and $40 Bunker Hunt silver buried in his back yard. He’s looking to get even any decade now!

  21. Fred commented on Jun 12

    You can’t argue with gold bugs…they’ll data mine their way around any logical point.

    These “arguements” are like saying water is more expensive than gasoline…because the get ~ a dollar for a few ounces in a bottle.

  22. Josh commented on Jun 12

    Think about this. 1000 ozs of gold back in the 70s bought a house. The same 1000 ozs of gold now will buy a house. 100 bought a upper class car. 100ozs today will still buy an upper class car. It has retained its value. Paper currency has not, that’s why so many more are needed today.

    Essentially your argument states that gold has appreciated at roughly the rate of CPI inflation (approximately 4.3% annualized) over the period. This represents a 0% real return. A diversified portfolio of stocks and bonds had a better return over the same period, so wouldn’t you have been better off investing via those instruments rather than in gold?

  23. Stuart commented on Jun 12

    It really comes down to purchasing power. Which has better retained it’s purchasing power since the US went off of the gold standard. A 1000 ozs of gold or US$35,000. Gold trades as a currency and reflects inflationary pressures. As a currency it has retained its purchasing power. There really is no credible arguement against that. One has to get into the heart of the issue of why prices rise. Again, inflation is first and foremost a monetary phenomena. oh, and re: the purse, butterflies, not moths.. ;-)

  24. Josh commented on Jun 12

    Comparing the purchasing power of gold and dollars doesn’t make sense. Gold isn’t a currency; it is no longer a unit of exchange. If you walked into a car dealership with $35,000 you could walk out with a car; if you went in with 1,000 ozs of gold, you can’t walk out with a car.

    Since gold trades in dollars, it reflects U.S. inflationary pressures. This means it wouldn’t have been a good inflation hedge for someone living in Brazil, for example. (To the extent gold prices reflect inflation expectations. Many believe geo-political risk, amongst other things, are reflected in the price of gold.)

    As I said before, if you’re looking to hedge inflationary pressures, you’d historically be better off investing in a diversified portfolio of stocks and bonds, rather than gold.

  25. Stuart commented on Jun 12

    “Since gold trades in dollars”. Really. Tell that to the Japanese, Canadians, Russians, Germans. US centric vision. I guess to the Japanese, gold must reflect US inflationary pressures too? Not. Now that doesn’t make sense. In short, if I’m German, I’m paying Euros for gold, NOT dollars. Gold is the most misunderstood market. Go check out goldmoney.com.

  26. Josh commented on Jun 12

    You are correct, I was mistaken in thinking that the primary market for gold was NYMEX. I completely forget about the spot market.

    You disregarded my first and third points.

  27. michael schumacher commented on Jun 12

    Fred-

    Bottled water IS more expensive than gasoline on a relative basis.

    But you knew that..

    Ciao
    MS

  28. Adam commented on Jun 12

    Stuart,

    I just checked out goldmoney.com per your advice. I don’t understand what this tells me about gold other than that there has been a great speculative run up in gold prices over the last 5 years just as there has been in housing.

    There is nothing on the site about economic fundamentals supporting why this is a deserved run up in prices nor is there evidence that they can sustain at current levels.

    I think that the most important thing to look at with regards to gold is what the US economy is doing. If you believe that hyper inflation is on the horizon, then it would be wise to get into gold and hedge against that.

    If you believe that the credit bubble could lead to a deflationary recession or even depression, then the last place you want your money is in gold.

    And let’s not forget sentiment. If people start to fear gold, or start to trust that the dollar can continue it’s current run, then the same mass hysteria that launched gold in 80 could cause it to see some significant losses in the short term.

    Thoughts?

  29. dn commented on Jun 12

    It is ridiculous to compare the May 2006 runup to the late-70s gold bubble.

    THEN:
    – roughly eightfold increase in 4 years
    – everyone was lining up around corners to buy gold coins
    – widespread perception that inflation would only get worse

    NOW:
    – roughly twofold increase in 4 years
    – most people still think gold is only for nut jobs
    – most people think inflation is “contained”

    Say what you will about gold as an investment but comparing 2006 to 1980 is nonsensical.

  30. Stuart commented on Jun 12

    Adam, what I think is coming is debt monetization leading to hyperinflation. One must remember, that we have a 60 Trillion dollar visa bill effectively coming due in installments starting next year. There has been quite a bit already discussed on the true nature of the Federal Debt. This blog has addressed the matter as well as many others. The government either renegs on these committments, borrows from abroad, which given he sums is not feasible, or it prints money to cover these liabilities. There would be riots in the street if they went back on their committment to pay OAS and medicare. Ergo, my belief is the printing presses will be going 24/7. And as they do make payments, these also become interest bearing. This is was David Walker was trying to explain numerous times. Hyperinflation IMO is baked in the cake.

  31. Stuart commented on Jun 12

    dn, re: comparing 1980 to 2006, agree you can’t but I think that’s what the opening chart on this blog was originally about. It was showing 2006 as basically 1976 equivalent.

  32. johntron commented on Jun 12

    replace gold with stocks and change the decade to the 90’s….provides a good anecdotal theory of the nineties.

    1991-1994….decreasing .tyx/geopolitical risk raised multiples….1994-1997 increased investor demand….1998-2000 spec. bubble.

  33. m3 commented on Jun 12

    adam-

    gold is a hedge against currency debasement, not inflation.

    it can look like an inflation hedge b/c price inflation is a result of currency debasement.

    we had mild inflation in the 90’s, but gold prices went nowhere because the USD was strong.

    so even in a deflationary monetary collapse, gold (and physical assets in general) would retain their value more that fiat currency.

    from a supply/demand perspective, new mine supply has remained constant, while demand has risen. the same argument applies for crude oil, gasoline, corn/ethanol, etc.

    so yes, these prices are sustainable; but they can be extremely volatile as well.

  34. DavidB commented on Jun 13

    Having watched the gold price for well over ten years now – the first five as a voracious gold bug and the second five as a much subdued gold-has-a-place-in-your-portfolio type – I have noticed that over the last year gold has not moved in a negative correlation to the stock market which was its traditional role. I have noticed these days that gold tends to trade down when the market is down and that it usually trades down when consumer goods are down. This has led me to believe that the market is treating and trading gold mainly for its value and function in jewelry sales as a consumer good and ignoring its role as currency crisis insurance.

    Whether this will remain true for very much longer is up to the gold market but as the gold ETFs continue to accumulate more gold this consumer coupling could start to erode and gold can shine again as an investment vehicle. Until that time happens I continue to trade in gold stocks and accumulate size in that market as a portion of my bigger portfolio. One thing gold stocks are still doing is keeping up their volatility which continues to make them a great trader’s market for those that like that sort of thing

  35. m3 commented on Jun 13

    I have noticed that over the last year gold has not moved in a negative correlation to the stock market which was its traditional role.

    that’s been true of everything. everything has gone up in the last couple years:

    real estate
    stocks
    bonds
    gold
    commodities

    every asset class is now correlated. it’s not just gold.

    the only thing that’s gone down is the dollar.

  36. Adam commented on Jun 13

    Thanks for the answers Stuart and m3, I am still just having some trouble wrapping my head around this whole confusing thing.

    m3, re: your last post, given the correlation of the assets you listed, what will the effect of a fizzling housing market be? We have already seen it have a negative affect on the stock market as housing related stocks suffer, but then recover (because of buy backs I don’t know).

    If the FED does raise the rates another 25 BPS, what will that do to housing and in turn, to the other assets.

    It looks to me (the novice) like there is just this chunk of wealth being moved from asset to asset as people continue to try and make quick and easy money (as they had in real estate for the last 4-5 years).

    Like I said, I am just trying to learn as I go. I am only 25 and I would love a greater understanding of things earlier rather than later in life.

    Thanks for your responses.

  37. m3 commented on Jun 14

    m3, re: your last post, given the correlation of the assets you listed, what will the effect of a fizzling housing market be?

    i dunno. it depends on credit growth. credit makes the world go round. if there’s enough of it, the stock market should be okay.

    b/c of subprime, credit has contracted in the real estate market, so they are hurting. it really depends on how much credit the banks want to throw at RE, and right now they appear to be reigning in the credit.

    if the fed hikes, it’ll probably hurt ARM holders, but they’re screwed either way. if the fed cuts or raises by 25bp, mortgage owners are still going to have a 20% jump in mortgage payments when the ARM resets. i don’t think the fed can do much, vis-a-vis interest rates.

    also, the fed doesn’t seem to have control of the money supply. so companies that are involved with structured finance/derivatives, or can access capital from overseas, can pretty much print their own money whenever they need it.

    btw, i’m only 28, & i’m trying to figure out this stuff too…

  38. zack commented on Jun 14

    Gold has been attaching/detaching from the dollar

    It played like crap in the March selloff. It played like crap over the last two weeks.

    It was great fun to be able to play in these and make money hand over fist through the spring of 2006. But the time for that trade has long passed.

    Gold is a late-stage cyclical, not a religion.

    The things that seemed to play well in this past week’s selloff were ag commodities – DBA’s done nothing but go straight up for two weeks. DBC has a pretty breakout.

    Canroys levered to NG and the NG companies themselves did fine… you barely knew there was a problem in the markets.

    It also looked to me like there were the quiet beginnings of a rotation into consumer noncyclicals. I just happen to own VGR and CL and follow a number of these.

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