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

Saturday, July 30, 2011


Here is an update on my long term Gold chart. Again, simply look at a monthly chart and tune out all of the noise. Gold is volatile and the daily ups and downs are going to get worse from here on out. My advice: ignore them.

If you are a short term trader in Gold then I think you are the worst type of masochist. Why would anybody want to sit through the chop, violent ranges and reversals that would accompany Gold on a short term timeframe? There are so many easier ways to make a buck. If you are a Gold 'trader', then don't read my stuff (you probably haven't been anyways).

My fundamental stance on Gold is quite different that most Gold investors (I am sure there are similarities, but there are also more than a few differences). This has been my stance for some time:

"Is Gold a hedge against inflation or deflation?". The problem is in the way the question is phrased, as if it is only a hedge against one or the other. Many people assume that either inflation or deflation affects precious metals, and that's not it at all. The answer when I think about it is: neither.

Consider in the 1980s, we had massive inflation. But Gold had already begun a major decline. Why? Because Volcker's policies had brought stability to the markets. Monetary policy was in a bad place, but he was starting to get things under control again (at least in comparison to the previous 10 years). Gold can fall in inflationary environments. It can also rise in inflationary environments. It can both rise and fall in deflationary environments as well.

I have rejected the 'Gold is an inflation hedge' argument for some time and that is reflected in my writings.

The reason why Gold will continue to do well is because of uncertainty. We see states calling for austerity because they are insolvent, we see Congress calling for austerity under the (incorrect) assumption that the Federal Government is 'insolvent', we see policy makers in Washington clueless with how to deal with the situation, we see that when Washington does take action it is usually to affect Wall Streets best interests (repeal of Glass-Steagall in 1999 being one of the worst offenses), etc.

I have demonstrated that QE is not inflationary. There are many things that people call inflationary that aren't. And many people are also discounting the deflationary tendencies of consumers being in a balance sheet recession. There are a lot of deflationary headwinds. But, QE and other monetary polices of that nature causes instability. Not through 'money expansion', but by changing asset compositions (which creates a psychological backstop based on a misunderstanding of the mechanics): 'the Bernanke Put'. This is causing much more risk taking (look at the re-explosion of margin debt over the last year). This is highly unstable.

And so if Gold is a hedge against anything, it is against instability and against government decisions that are not in the interest of a smoothly functioning marketplace (policies that promote instability), regardless if the overall effect is inflationary or deflationary.

Gold has been monetary asset for thousands of years. This is why if anything is to behave as an anchor against instability, it is Gold. I am unconvinced that things have 'returned to normal', in any sense of the term. So I tend to think Gold will be in a bull market for some time. This doesn't mean the stock market will or has to crash either. I have shown through my long term Gold / SPX correlation charts that although Gold and Equities are mostly negatively correlated, there are significant periods of positive correlation. This is also why looking at Gold ratio charts is so informative.
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