15:1 – The black and the yellow

We had a few Gold comments last week (including the Real Oil vs Real Gold chart).  The Buttonwood column in this week’s Economist (hat tip to Scott Frew) takes on some of the history of these two commodities:

The black and the yellow

So much for black gold. What about the real thing, which fans have been expecting to take off for months, if not years, in tandem with it? After all, the last time oil was on such a ride (in the 1970s), gold tore right along with it, ending up at $850 an ounce in 1980.

Since the second world war, gold bugs say, the prices of oil and gold have followed each other about, give or take the odd lag. An ounce of gold has fetched just over 15 barrels of oil, on average, and whenever that ratio got seriously out of whack one price or the other quickly adjusted. But gold and oil have been drifting apart for at least four years. While oil has blasted up by 60% so far this year, gold has risen only fractionally. These days an ounce of gold, at just under $450, buys a mere seven barrels of oil. In other words, the purchasing power of gold has been badly eroded.

Gold is a strange substance. It is a commodity, an investment and a means of exchange, and its price reflects all those roles.

Ahhh, but that’s the entire point: If any of the reason for owning gold still exist, and if one believes in botht he 15:1 ratio (I’m agnostic) and in reversion to the mean (true believer), than thatwould bode well for Gold — eventually.

Given the psychological component to being an owner of Gold, that suggests some shock would have to occur prior to any outsized move. For the Gold bugs, there’s no end of leading exogeneous shock candidates.   

Buttonwood continues:

Like any commodity, it responds to the laws of supply and demand. New figures from the World Gold Council, which groups producers, show that demand for physical gold is growing strongly, up by 21% in tonnage terms during the first half of 2005 compared with the same period a year earlier. Supply, meanwhile, increased less quickly, by just 18%, thanks partly to slowing central-bank sales. Gold supplies are eminently manipulable, however, and if prices rise substantially, a lot more of the stuff will hit the market.

It is from its role as an investment and a means of exchange, though, that gold derives its real mystique. Sentiment is important: in a small market, a few big positions affect prices more than, for example, they could do in the oil market. And that sentiment depends, more than anything, on expectations about inflation and the value of the dollar.

When people believe that paper assets are worth something approaching their face value, they buy gold to wear but not to put in a safe

In the past, gold prices rose with oil prices because inflation did too, and gold was seen as a safe store of value. Yet investors have not really viewed inflation as a threat for a couple of years, continuing to buy shares and houses, for example, in preference to gold despite the huge run-up in crude prices. The notion that higher oil prices will tax growth rather than stoke inflation has gained, dare one say, currency. (emphasis added)

What’s all this have to do with the economy, markets, consumer spending, etc?  Read on:

Just as inflation has, until now, lain low, and gold with it, America’s dollar has also been resisting arrest. Gold is after all a monetary metal, an alternative to the paper currency that replaced it at the heart of the world’s trading system, when times are tough. But they haven’t seemed tough so far. Despite America’s famous twin deficits, everyone else’s currency has been even less appealing, and big exporters such as China have had their own reasons for propping up the dollar. Now, as Katrina heaps billions on a national debt that is already close to $8 trillion, might that perception change? The time is surely not far off.

For at the end of the day, the price of gold reflects confidence, more than anything. When people are confident that their central banks will control inflation while permitting the economy to grow, when they believe that paper assets are worth something approaching their face value, they buy gold to wear but not to put in a safe. Alan Greenspan has achieved the remarkable feat of suspending disbelief in America’s gerrymandered finances for the past few years. On his departure, watch the gold price soar."

Interesting stuff. In addition to the technical breakout of gold, there are other reasons for those who are concerned about 2006/07 to own the stuff.  I prefer the GLD trust holders — I first mentioned this on a Power Lunch (3/30/05) — but the more adventurous amongst you can certainly look into the futures market and own the yellow stuff directly.  The usual caveats apply . . .

Source:
Pump panic, gold glee
Time to roll out the safe havens?
The Economist, Sep 13th 2005
Buttonwood
http://www.economist.com/agenda/displayStory.cfm?story_id=4398821

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Except for Inflation, there’s no Inflation

So let me make sure I completely understand this: If we back out all of the inflationary data from the CPI, and PPI, there is, um, no inflation? 

Thanks for clarifying that.

While the Dismal Set — and the majority of CNBC guests — continue to spout such foolish nonsense, its nice to see that at least the WSJ wasn’t bamboozeled. Their online headline read:  Consumer Prices Climb 0.5%

"Gasoline prices shot up 8.3%, the biggest increase since February 2003.
Food prices, however, were unchanged for the first time in nine months.
Medical-care prices were unchanged after nearly 30 years of increases.
Housing prices grew more slowly in August, falling to a 0.2% rate from
0.4% in July. Automobile prices fell 0.5%, half the rate of decline
recorded in July."

You can see more from the dismal set below . . .


UPDATE I: September 16, 2005 10:54 am

Its the ultimate Hedonic adjustment:  Chart of the Day shows us graphically that without the items that are going up in price, there is hardly any inflation at all! 

Core_inflation



UPDATE II: September 17, 2005 11:54 am

The first official chart from the weekend WSJ:

Inflation


UPDATE III: September 24, 2005 2:54 pm

Here’s a round up of all our recent discussions on inflation

Sources:
Consumer Prices Climb 0.5%
Katrina Helps Propel Jobless Claims
To Highest Level in Nearly 10 Years
WALL STREET JOURNAL, September 15, 2005 5:44 p.m.
http://online.wsj.com/article/0,,SB112678676740241720,00.html

Read More

Category: Economy, Fixed Income/Interest Rates