I analyze macroeconomic issues from a fundamental perspective, and I analyze market behavior from a technical perspective. Original macroeconomic analysis can be found here and both macro analysis and commentary can be found on my Caps blog. If you like or appreciate my analysis, please add yourself to my Following List

Monday, November 30, 2009

A Look at a Few Gold Ratios / A Few Words on Risk

I have talked about gold ratios and their importance several times in the past (The Gold Blog. Gold/Silver/GSMs (and a little Oil for good measure), Thoughts on the Dow/Gold Ratio, etc.). It is important to look at the performance of asset classes not only in nominal terms (all US assets are bought and paid for in Federal Reserve Notes (aka the US Dollar) and so everything has an exchange rate whether you are consciously aware of it or not. e.g. 1150 FRNs (or $) / Maytag Neptune Front Load Washing Machine (item)) but in terms of other currencies (765 EUR / Maytag Neptune Front Load Washing Machine (item)), most especially gold (1oz Gold / Maytag Neptune Front Load Washing Machine (item)).

If you don't think gold is a currency, then stop wasting your time reading this post.

Gold is a very important unit of monetary measure (I will not go into a big diatribe here. I have covered this many times already as have many other bloggers and writers). Most specifically gold:

1) Is the longest lived currency in history
2) Is a non-inflating currency (new mining supply adds very little to the above ground supply, on the order of 0.5%-1.5% per year)
3) Gold is a safe haven asset. It doesn't pay dividends, it does not multiply. It holds value. It protects wealth. As such when risk is high / confidence in the financials markets is low gold historically outperforms

And guess what gold is doing right now :

Yep, you bet. It is outperforming.

What does this say for the risk of most asset classes right now? Gold stars to everyone who said that risk is high.

And this shows up on many other measures besides gold. Look a comparison of the Dow ("safe" blue chips) vs. the Russell 2000 ("risky" small caps), and tell me in a straight face that risk is low and it is safe to be bullish.

Have fun.
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