Those who believe the rally in gold is sending the wrong message on inflation might take comfort from the fact that the price of the yellow metal relative to that of the 30-year Treasury bond is approaching a 30-year high.

goldbond

Perhaps not coincidentally, the earlier run-up marked the peak of hysteria about inflation — and a multi-decade top in gold.

Of course, there may be other reasons why precious metals (and other commodities, for that matter) are rallying, including safe haven buying and the torrent of cheap money flowing into a wide range of speculative asset classes.

Still, it seems like the gold bulls may be getting a bit ahead of themselves.

Category: Asset Allocation, Commodities, Gold & Precious Metals, Investing, Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

42 Responses to “A Déjà Vu Moment in Gold?”

  1. xynz says:

    Are you expecting the Fed to raise interest rates about 20%? If not, then I’m not sure that the spike from 30 years ago is a valid comparison.

  2. “Of course, there may be other reasons why precious metals (and other commodities, for that matter) are rallying, including safe haven buying and the torrent of cheap money flowing into a wide range of speculative asset classes.”

    How about declining production/supply? There’s been a lot more talk about that lately…

    “Has The World Reached Peak Gold”
    http://www.boom2bust.com/2009/11/13/has-the-world-reached-peak-gold/

    “Top Mining Companies: Gold Output To Decline Long-Term”
    http://www.boom2bust.com/2009/11/17/top-mining-companies-gold-output-to-decline-long-term/

    Do you guys buy into the “peak gold” argument?

  3. thatsabet says:

    heres the dilemma…if USTreasuries rise at this point what does that say about economic growth in the US? I get the need for yld…but below 3.5% on the 10yr provides minimal income for a bruised baby boomer (70M strong)….that scenario will most likely call for further GOVT stimulus which seems likely to undermine future bids in UST. Should that scenario take hold GLOBAL CBs will continue to diversify into other assets and GOLD will most likely be a beneficiary.

    OR…GOLD could correct. Always a possibility. But, like Russell stated last nite:
    Today, with the world in turmoil, rich men may be saying to themselves, “I don’t know what’s going on any more, and frankly, I don’t know where I’ll be in ten years. But if I own a thousand ounces of gold, I’ll know I’m rich. I don’t know what the price of gold will be when this whole mess is over, but I know I’ll still be wealthy if I own a thousand ounces of gold.”

  4. Stuart says:

    Gold reflects increasing doubts about the untenable levels of US debt, particularly abroad. Nothing goes in a straight line, but the channel remains upwards until the US Govt gets its fiscal house in order. It’s not in a bubble because the factors pushing it higher are gaining intensity. Default or Print, no other option and it’s highly doubtful any political power in DC has the backbone to live with the immediate consequences on defaulting on its obligations. We will soon find out IMO exactly how much physical supply really does back up the claims for it. It better be there, else this is a blip.

  5. ItalicBold says:

    Alternatively it looks like a very bad time to own 30 year treasuries!!!

  6. The Curmudgeon says:

    The chart illustrates perfectly the correlation between feckless monetary manipulations intended to create the illusion of income growth in two different eras–the late 70′s/early 80′s and the aughts. In both instances, real wages in the United States were/are declining as a result of the pressures of international wage arbitrage, and the relative decline of US economic hegemony. In both cases, the Fed tried to manipulate the currency to make it appear things were otherwise. The prescription for this instance is same as last–sweep up the excess dollars with positive real interest rates, such as Volcker did in the early 80′s. If a true picture of the declining value of the dollar were considered, one taking account of asset inflation, real interest rates would now be negative, which is precisely what happens the supply of money far exceeds its demand, i.e., inflation.

    In the seventies, productivity improvements due to the industrial revolution had peaked and were falling, with labor being the only input with some room for cost improvements, but with a rigid cost structure in the US regarding wages and working conditions, those improvements increasingly came from overseas. The same is beginning to happen now with the productivity improvements of the information age, and again the only way to squeeze out more productivity is to reduce the labor input, either cost-wise or with fewer laborers (unemployment, then as now).

    The prescription for what ails us is to do exactly the opposite of what the Fed is doing (isn’t it always that way w/ government interventions in markets?). The Fed needs to mop up liquidity with near-punitive interest rates; let whatever should fail do so, and clear the way for real growth in production and income for the future. But this sort of creative destruction is exactly what the politicians are trying to prevent, w/ TARP, the new regulatory regime being considered, etc. This is how success always ultimately sows its own seeds of destruction–everything the Fed and the Federal government are doing now will ultimately hasten our economic, and thereby, geopolitical demise. We can only contemplate these silly measures to save dying industries and companies because of the pain endured during the seventies and eighties as economic reorganization was haltingly allowed to proceed. The dollar crisis of 1979 prompted the acceptance of pain. Perhaps the current near-crisis will do the same this time.

  7. leftback says:

    Thanks for posting this interesting and useful metric, Barry. These long-term measures are extraordinarily useful, like the 10y yield/S&P dividend ratio measure we looked at in the dark days of the winter.

    I have said this before here and will say it again, that other assets are going to blow up long before the US Treasury bond market and the US dollar. If there is one thing the Fed is determined to do, it is to keep interest rates low in order to prevent a complete catastrophe in US housing and corporate bond markets. They will sacrifice other asset classes to achieve this aim, if necessary.

    The debt to GDP ratio in Japan is WORSE than ours, and as Japan’s savings decline in a stagnant economy we may conceivably see a scenario where JGBs collapse, the yen devalues – and USTs take over as a safe haven in credit. Another equity sell-off in the US would also stabilize the Treasury market.

    We are in a world of weak currencies, but as long as yours is not the weakest on the block, you can live to fight another day. Right now, everyone is negative on the US$ but there are other countries out there with problems that may prove even worse. Japan is only one example. The economy in Spain is so incredibly weak that at some stage the ECB has to experience significant political pressure to “do something” for its weaker brethren.

  8. davossherman@gmail.com says:

    The 4 G’s: God, Gold, Guns and the Government will Katrina it.

    It is all about the wooden nickel – Bernake’s dollar.

    Even Greenspan is buying gold bars.

    Gold should reflect every trillion in Quantitative Eased Counterfeit by $4,000 an ounce. At a minimum it should be between 4k and 8k, on a global scale I believe they have eased 5 trillion so 20k is not out of the question.

    Paper money eventually returns to its intrinsic value — zero ~ Voltaire.

    4,800 have gone the route. I suspect that with over 100 trillion in debt and unfunded liabilities that we are in the early troughs of this now.

  9. Freestate says:

    You can’t do this comparison in nominal values. You have to use inflation adjusted values. If you do that you will find that the current ratio is somewhere around two. And that is the real point to understand – in real dollar terms gold is much cheaper than it was in the late 1970′s and earl 80′s.

  10. Dave in SW Oregon says:

    The price of Gold also reflects doubts about the debt as money and credit as currency substitutes crafted by the financial wizards, where in those values are a function of another entity’s debts or obligations or liabilities. Owning physical Gold has neither a liability nor obligation to another entity.

    As debt goes bad, why would a rational person looking to preserve wealth want to hold a riskier asset?

    But there are no risks with Treasuries, some would argue. The risk is that while that “debt as asset” will be surely repaid, even if Ben and Fed-sters have to print to repay, it will be repaid, but the purchasing power will likely have evaporated.

    In a crisis of confidence, and in my opinion there very much still is one, caused by an excess of debt, risk preference moves down John Exters inverted money pyramid toward Gold and safer holdings, cash, Treasuries, etc., and away from riskier holdings, low graded corporate debt, junk bonds, OTC stock, small caps, etc.

    Exter’s inverted money pyramid: http://commons.wikimedia.org/wiki/File:Inverse_pyramid_of_John_Exter.png

    Modern update version: http://www.creditcontraction.com/images/affiliate/Great-Credit-Contraction-Liquidity-Pyramid-Large.jpg

    Before this whole deleveraging and debt as money confidence game come to an end, the enormous derivatives cloud must evaporate.

  11. Marcus Aurelius says:

    The current uptrend looks nothing like the one 30 years ago, which apparently went straight up.

    Our current predicament is unprecedented.

  12. leftback says:

    There are clearly risks with Treasuries, but see the history of JGB yields. There are other herds of buffalo inside telephone boxes that we need to worry about before risks of US Treasuries become an immense problem.

    Agreed completely with the above regarding the inverted pyramid. When bubbles burst, money finds its way down the pyramid as surely as water finds its way to the ocean.

  13. Pool Shark says:

    There’s one significant thing missing from the comparison Barry:

    What are the odds Bernanke will begin channeling Volcker and raise the fed funds rate to 20%?

    Frankly, the US$ was a bubble balloon that is now slowly deflating….

  14. leftback says:

    http://2and20vision.wordpress.com/

    This is a very thoughtful post on JGBs and USTs, an issue that will become more important with time.

  15. carrottop says:

    does anybody know anything about the massive jpmorgan short gold/silver futures position to expire next monday?

    http://www.gold-speculator.com/ed-steer/13337-gold-silver-daily-jpmorgan-holds-40-all-silver-short-positions-oct-17-2009-a.html

    the market for TUMS could be cornered by them soon…

  16. Raphael says:

    It makes no sense to compare the price of gold to a bond since the bond will always be worth 100 (par) in the end. That’s why you should look at the ratio of gold to oil, equities, real estate, you name it (as long as it increases in time).

    http://raphaelkahan.blogspot.com/2009/11/gold-is-overbought.html

  17. Pool Shark says:

    I still see/hear lots of bearish sentiment on gold…

    This run still has a long ways to go before we get our blow-off top.

    $1,300 anyone?

    http://danericselliottwaves.blogspot.com/2009/11/parabolic-gold.html

  18. SteveC says:

    Sorry goldbugs, but I believe gold is a short at these levels. The USD is due for a rally that could last several months or longer.

  19. DL says:

    Thought-provoking graph. Certainly China is a much bigger factor now than it was in 1979 as a result of its (now) T-bond purchases, its currency peg, and its low-cost consumer goods. The China factor probably affects the bond market much more than it affects the gold market.

  20. DaveInDenver says:

    Gold’s tautological inverse twin: Requiem for the US dollar

    The Fed is in the process of massively devaluing the US dollar, which is an insidious and subtle way for them to confiscate your dollar-based wealth, including your IRA, 401k. any cash-equivalent investments like Treasury bonds, muni bonds, defeased munis AND bank savings and CD accounts.

    http://truthingold.blogspot.com/2009/11/hemingways-proverbial-bell-is-tolling.html

  21. investorinpa says:

    SteveC…if the dollar rallies, that may not mean that gold has to go down…

  22. leftback says:

    “The China factor probably affects the bond market much more than it affects the gold market.”

    True. Gold may go much higher in the long run, but sooner or later someone will notice that the yield on gold is even lower than on long-term bonds. This tends to be especially true when the gold price is going down…

  23. SteveC says:

    @investorinpa; True, but the normal relationship between gold and the dollar is opposite, especially when gold is seen as an alternative currency. If you listened today, Obama came out against additional stimulus in favor of paying down government debt. I don’t believe it will happen, but that talk definitely boosts the dollar. The run in gold was a good one, but I think the run is over for now.

  24. HCF says:

    @SteveC:

    I don’t completely disagree with you about the dollar, but what is the catalyst for dollar going up / gold going down other than the argument that the dollar is “oversold” right now? Clearly the Federal Reserve has come out publicly with the declaration that ZIRP is here for an “extended period.” Unless other central banks also go to ZIRP and quantitative easing policies to the extent as the U.S. Fed, or the Fed goes against public declarations, the trends for gold and dollar are both clearly defined.

    HCF

  25. HCF says:

    @ SteveC:
    > the normal relationship between gold and the dollar is opposite

    To add to my points, the normal relationship between stocks, (non-Treasury) bonds, and commodities is not a correlation of 1, but last year all three suddenly fell in perfect harmony. Think about all the people and all the hedge funds that have blown up waiting for correlation trades or convergence trades to actually converge (LTCM, anyone?). I just hope Obama’s statements against more stimulus and for paying down debt have more meaning to them than the Geithner/Paulson/Bernanke declarations of wanting a “strong dollar.”

    With that said, your points on gold are well taken and I am watching my position like a hawk…

    HCF

  26. SteveC says:

    Whether its a stock or commodity, if too many are leaning the same way, expect some violent moves the other way. Conventional knowledge is that the dollar is doomed and that gold is going to the moon. Those that hold the opposite position are laughed at and clearly in the minority. The dollar can strengthen for no other reason than to frustrate the majority of traders (which is what markets like to do).

  27. HCF says:

    @SteveC:

    Are you saying that short gold is good as a trade or as a macro play? I would agree if you say short term… In fact, I bought UUP call options (long dollar index) about a month ago to partially hedge my gold position in case of your proposed scenario, but those will most likely expire on Friday worthless.

    The trend on gold will reverse, no doubt, as nothing goes to the moon. In my macro view, though, there isn’t enough panic or mania in gold to justify an imminent large correction (i.e. the trend reversing). If gold starts going parabolic or if everyone at work suddenly has 80% of their portfolio in GLD and can quote the minute by minute price, then I’ll definitely know to get the hell out…

    HCF

  28. HCF says:

    And to clarify, SteveC, I am not laughing at your minority position. It seems well reasoned… I think I may just disagree on the timing of your call.

    HCF

  29. flipspiceland says:

    “..Conventional knowledge is that the dollar is doomed and that gold is going to the moon.”

    @SteveC:

    Conventional?

    Maybe here and some other more economically savvy venues, but that’s not conventional by any means, in fact it’s but a fraction of a fraction.

    Except for the occasional person I hear saying they sold their gold to some gold cadging outfit for a few hundred dollars, and being proud of it, with no real incisive thought into what they just did (they think they got a real bargain since they didn’t do any research) I don’t see the gold view as anything but remarkably ill-informed. They likely belong to the class who only look a their monthly 201K and other broker statements in a moment of self-flagellation or a drunken stupor, which is most everyone. But by the looks of the volume on the NYSE on any given day being driven by trader/robots with arcane algorithms and the occasional retail gambler, most people are sticking with their willing denials of real world financial maneuvering going on by the PPT.

  30. SteveC says:

    The gold market hasn’t been popular with the masses since 1980, so a lot of people have grown old and died waiting for the public to jump in head over heals on gold again. As in any market, most speculators lose money, one reason why governments should not speculate on currencies or commodities. If you look at the government of India and their large purchase of gold, they have moved from being a hedger to a speculator in a big way. My hunch is they lose their shirts, at least in the short term. I’m viewing their buy as a contrary signal that the move in gold is over, for now.

  31. insaneclownposse says:

    Gold might be a decent short from $1150 for a swing trade. There is a chance it will consolidate at these levels.
    Personally, I think shorting gold is far too dangerous right now. For me it’s safer to buy on a pullback and play the long side rather than try to pick a top in front of ridiculous upside momentum.

    It’ll be instructive to see what happens right here. If it blows through $1150 in the next couple of days, maybe $1400 is a decent target within the next few months.

    I think there is a nasty short squeeze going on in the physical gold market. If you have to deliver the metal, it’s starting to become problematic.

    I’d play the juniors. They traditionally have monster appreciation during gold manias. Full disclosure – long GLD and long a couple of juniors.

  32. Steve Barry says:

    I have been a gold bull in the past and would be now given it’s chart, if not for two key things:

    1) Short term, speculation is near record levels

    2) Long term, we are facing a massive deflation…gold likely will outperform other assets, but will likely depreciate

  33. Mike in Nola says:

    Lefty: At the risk of insulting you by calling you a Scot, are you sure you aren’t really Hugh Hendry?

    http://advisoranalyst.com/glablog/2009/10/23/hugh-hendry-stocks-and-gold-are-crowded-all-one-way-all-one-trade/

  34. mgnagy says:

    @davossherman:

    “Even Greenspan is buying gold bars.”

    Good line. No way I’ll drop a five-page speech here, so, search on the web for Greenspan & “Gold and Economic Freedom.”

    I’ve always been amazed that he went from this address in 1967 to…well…whatever you want to call it.

  35. mdod says:

    I know that doing gold prices relative to stocks, bonds, etc is popular illustration and interesting to see, but that is not a valuation gauge of gold. It is meaningless. Why not price gold in cows or corn?

    The intrinsic value of gold should be based on its use as an industrial metal. Any price that someone might pay above that is speculative. You either think that it is pretty, it helps you sleep at night, or you are speculating on something – collapse of the global financial system, etc.

    Gold is not a business; it does not generate income; it does not have an R&D department or a sales staff. We dig it up from one hole in the ground and bury it in another. It is a speculation. “Valuing” a speculation is a guess as to what others will do: buy or sell. Not the same as a valuation..

    I’m not sure that you can come to any conclusive decision on where gold is going from this chart…

  36. Pat G. says:

    To correlate your chart by adjusting for inflation, gold would need to be at $2200. It’s half that.

  37. Pat G. says:

    “Still, it seems like the gold bulls may be getting a bit ahead of themselves.”

    And another thing as you know, the gold bulls were in a long time ago building their positions. Because they could read the handwriting on the wall. Everyone piling in now is late to the party. But that’s okay with us. It will have to lose more than half its current value to effect us. Fat chance…

  38. some_guy_in_a_cube says:

    More data mining of noise yielding something recognizable.

  39. philipat says:

    Trivia fact of the day (Source totally unreliable):

    All the Gold ever taken out of the ground would fit into 2 Olympic sized swimming pools.

    Now, an Olympic sized pool can be quite daunting when actually trying to swim the length of it, when Gold is put into this context is does seem to put a different perspective on it. Anyone know the location of the 2 pools?

  40. Philipat,

    That’s pretty close. An Olympic sized pool holds 53,746 tons of gold. Two pools hold 107,493 tons. The entire production of gold since 5,000 BC is estimated at 155,000 tons.

    So three Olympic sized pools would be the closer answer.

    Work:

    Amount of gold mined since 5,000 BC:
    http://www.ppionline.org/ppi_ci.cfm?knlgAreaID=108&subsecID=900003&contentID=254140

    Weight of one cubic foot of gold:
    http://answers.yahoo.com/question/index?qid=20080207161440AAEhYVN

    Number of cubic feet in an Olympic sized swimming pool:
    http://answers.yahoo.com/question/index?qid=20080108044123AAXhroa

  41. philipat says:

    Douglas,

    Thanks, I stand corrected. But what’s an extra Olympic sized pool between friends!

    I still find it quite amazing. I suspect that with all the QE, the number of pools to hold all the Dollars in circulation would be rather larger? You probably have the answer?!!

  42. What does this chart AND the one of SP 500 v Gold tell us?