Gold, Silver And The Gold:Silver Ratio

As a reference, below is a monthly chart of Gold, Silver, the Gold:Silver ratio, and the S&P500, from January 1, 1980 through February 12, 2016 with price labels:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1883.59 as this post is written

Gold And Deflationary Pressures

In my April 27 post ("Reasons Behind Gold's Ascent") I outlined a variety of factors that I believed were driving Gold's advance.

Point #4 on the list was "...an expectation of high future inflation."

It should be also noted that the inverse of this condition - an expectation of deflation - can serve to depress Gold's price.

This is particularly noteworthy at present, as Gold has recently started a correction after a very steep rally.  I am very closely monitoring Gold as I believe a steep, abnormal correction could serve to (further) indicate deflationary pressures - which of course would have outsized impacts on financial markets, the economy, and economic policy (particularly QE3 or some other large intervention.)

For reference, here is the daily Gold price chart for the last 5 years, updated through yesterday, shown on a LOG scale with both the 50dma  and 200dma lines as indicated:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; annotations by the author)



Gold at $1726/oz (December futures) at the time of this post
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The Special Note summarizes my overall thoughts about our economic situation


SPX at 1176.07 as this post is written

Reasons Behind Gold's Ascent

The reasons behind Gold's (as well as Silver's) price movements is always complex. There are a lot of factors involved.

Back on September 22, 2010, I wrote a blog post (on another site) titled "What is Gold 'Telling Us'"? I have reprinted it below, as I think that it is important to recognize the potential factors involved. Of course, this does not speak as to whether the rapid ascent is sustainable, or ultimate price targets.

Here is the post:

As Gold continues its rapid ascent, I think it is important to consider what such price action may be "telling us."

Many classify Gold's strong price action as that of an asset experiencing a "bubble" - and as such do not properly heed the fundamentals that may be driving its price action. I have previously discussed whether Gold is in a bubble in this post.

While Gold may be advancing for many reasons, I would offer these (in no particular order) as among the top reasons for its ascent:

1. Vulnerability of the US Dollar to a substantial decline, discussed in this article.
2. Excessively low interest rates.
3. Too much "money printing" - both now and projected in the future.
4. Related to Points 1-3 above, an expectation of high future inflation.
5. Large money flows into the Gold market, which is relatively (in proportion to other asset classes) small.
6. A portent of an impending adverse economic event(s)
7. Related to point 6 above, a desire to obtain a "safe haven"

I believe that the most important issue for those holding Gold is the following, as I mentioned in the "Is Gold Experiencing A Bubble?" post mentioned above:

"Perhaps the greater question should be whether various asset classes are currently experiencing bubbles, and whether Gold is just one of a few (or many) classes in such a condition. In effect, is Gold's price strongly (positively) correlated to that of other asset classes, and if so, why?"

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1347.99 as this post is written

Gold (June Gold futures) at $1512/oz as this post is written

Gold And Gold Stocks

I have made various comments about Gold over the last few months.

One aspect during Gold's price increase that I have noted as disconcerting is the relative lagging performance of the Gold stocks. I use the HUI index as a proxy for Gold stocks.

As one can see on the daily chart below, the Gold price is reflected in the top of the chart, followed by the HUI:Gold ratio and then HUI in green:



chart courtesy of StockCharts.com

The HUI index has lagged since approximately the beginning of 2008. Perhaps the main question is if/when might it start performing better? One potentially bullish sign is a potential Cup and Handle formation with the two peaks above 500 and current upswing serving as the "lid" and "handle" of the Cup and Handle formation, respectively.

Of course, this Cup and Handle formation is very tentative at this time. It is simply something to monitor. However, should this C&H formation "play out" with the HUI strongly advancing above the prior peaks above 500, one could reasonably expect the gold price to react positively if not very much so. Should it not play out, i.e. the HUI price falters or declines from here, would likely be a bearish omen for Gold.

As I have pointed out in previous posts, Gold's price can have very important implications from many financial and economic perspectives. However, due to the complexity of the factors that determine Gold's price, it can be very difficult to predict its price movements.


SPX at 1066.43 as this post is written

Two Other Views Of The Gold Price

I find a periodic review of Gold's price relative to the Dow Jones Industrials' and to Crude Oil's interesting.

Below is a long-term monthly chart of the Dow Jones Industrial Average price relative to that of Gold's. As one can see, Gold has been outperforming since roughly 2001, after underperforming from roughly 1981-2000:



chart courtesy of StockCharts.com

Below is a long-term monthly chart of the Crude Oil price relative to that of Gold's. As one can see, the Gold price has been bouncing around in a range since 1990, and is now at a slightly subdued level:



chart courtesy of StockCharts.com

One can infer many different things from these two charts. With regard to the first chart, one way to view this is to see how "hard assets" are performing relative to "paper assets." With regard to the above chart, one can see how Gold is performing to another commodity, crude oil. From this crude oil to Gold price comparison, one may interpret Gold's unique "safe haven" value. If one chooses to view the chart in this manner, one could draw the conclusion that from a "safe haven" standpoint, Gold's price is not reflecting much of a "safe haven" value. This view is consistent with previous comments I have made with regard to Gold.

I strongly believe that the strongest driver of Gold's price (especially relative to other assets) will be if/when it is viewed as the ultimate "safe haven" asset. This condition would likely occur concomitant to a repudiation of "paper" assets.



SPX at 1098.76 as this post is written

Another Thought On Gold

A November 20 Wall Street Journal article stated that Gold's January 1980 record high would have an inflation-adjusted equivalent of $2,290/oz.

I find it amazing that even after the long parabolic rise we have seen in Gold since 2001, we are still far short of that inflation-adjusted price. On an "all things considered" basis one would have thought that Gold would have performed stronger over the last 30 or so years. The Gold price really went into submission from 1980-2000.

I think it underscores the fact that at least from a historical perspective of the last few decades, it has been very important as to when Gold is purchased.

I mention this as Gold appears overdue for at least some type of correction. The recent price action, resulting with Gold now at $1169 (December futures) has been strongly parabolic.

I think that many factors are now in play that will generate considerable volatility in Gold's price going forward.

Gold's price should be very interesting to watch, and I think it carries great significance on a number of fronts.



SPX at 1106.24 as this post is written

Is Gold Experiencing A Bubble?

One of the questions that frequently arises with Gold's recent strong performance is "Is Gold in a bubble?"

Before I make some comments concerning this question, here is a long-term monthly chart of Gold for reference:



Chart Courtesy of StockCharts.com

Anytime a security acts as strongly as Gold has, it is natural to suspect a bubble. This is especially true with Gold's price currently, as many people don't understand the complexity of the factors that can drive Gold's price.

As I have previously noted in various blog posts (which can be found under the "Investor" Category on the right-hand side of the home page) Gold's price can be very hard to predict. To a greater extent than other securities, there are many different, hard-to-quantify factors that can drive the Gold price.

Furthermore, the market for Gold is relatively small in relation to other asset markets, so investment flows both in and out of Gold can be magnified.

Is Gold in a bubble? Given the aforementioned, I would hesitate to make an affirmative declaration. This is not to say that it is not overvalued or "ahead of itself." As I wrote in a September 25 post, "I like Gold's properties. However, I don't believe that the economic factors now in existence support a strong Gold price, from an 'all things considered' basis."

Perhaps the greater question should be whether various asset classes are currently experiencing bubbles, and whether Gold is just one of a few (or many) classes in such a condition. In effect, is Gold's price strongly (positively) correlated to that of other asset classes, and if so, why?


SPX at 1091.01 as this post is written

A Few Comments About Gold

Gold's recent price performance has been very strong.

There are, however, quite a few indicators that, from a historical perspective, seem to disconfirm Gold's current price, which as I write this is $1101 for the December futures contract.

One of the factors that seems to be speaking against Gold is the lagging performance of the HUI Index. As I wrote in the June 16 blog post:

"One measure that I follow is the ratio of HUI (an index of gold stocks) to that of the physical metal itself. One theory, perhaps the predominant one, is that the gold stocks should move, or at least verify, the price movements of the physical gold itself. Looking at the weekly chart (seen below) over the last 10 years seems to indicate that although gold has been relatively buoyant over the last year, the gold stocks, as seen by the HUI Index, have lagged since early 2008. One interpretation of this is that the gold stocks are not confirming the move in gold, meaning that gold may soon head down..."

Although Gold has continued to head up, as one can see in the chart below, the HUI:Gold ratio continues to lag and is at subdued (relative to the last ten years') levels:



Chart Courtesy of StockCharts.com

I find the lagging performance of the Gold stocks, as seen by the HUI Index, to be very conspicuous. This is especially so given the current investment environment where investors have shown they are even willing to aggressively bid up prices for securities that possess the most dubious of fundamental value.

In my opinion, predicting Gold's price has always been difficult. There are a variety of reasons for this, including the fact that the markets for both physical Gold and Gold stocks are relatively small. It doesn't take large investment inflows, or outflows, to move the price significantly.

Of course, Gold can be viewed as the ultimate "safe haven" security. Placing a value on this "safe haven" aspect is very difficult. Could Gold's current price be reflecting a significant "safe haven" premium? In effect, could the current strong performance of Gold somehow be a precursor of (more) economic problems? The answer to both of these questions can certainly be "yes." However, if so, it would be odd to have Gold rising strongly at the same time low quality paper assets have been rising strongly as well. From a long-term historical perspective, usually Gold's "safe haven" qualities are most highly valued when "paper" assets are suffering.

Gold's price action should be interesting going forward...



SPX at 1093.69 as this post is written

Gold and Implications

The strong price action of gold lately has been interesting.

As seen in the daily price chart, the $1000 level has been a pivotal area.

For a variety of reasons I am closely watching whether this $1000 price level will be surpassed. I am under the impression, due to a variety of factors, that either gold will soon strongly surpass this $1000 level, or fail to and begin a strong descent. In essence, I think we have approached the "moment of truth" for gold, and it will "break" from this $1000 level decisively either up or down.

As many know, gold has a long-standing reputation as performing strongly during what is perceived to be inflationary conditions. As such, how it performs here in the short-term could prove instructive on this topic, which would impact many other markets.

The hyperinflation / inflation / deflation debate is of foremost importance at this time for many reasons. How this debate is "answered" will have vast implications for investors, business, and the nation's financial standing.

SPX at 1003.24 as this post is written