Friday, May 23, 2014


The gold bugs likely will hate seeing this, but the future of gold hardly looks shiny. Once we price gold in gold-weighted dollars, we see reality. Let's have a look.

From when Nixon slammed shut the gold window, gold hit its all-time peak of $377.28 (in GWDs) in July 1980. From there, gold fell, first violently and  then slowly until hitting its all-time low of $51.94 by April 2001. Gold fell a whopping 86.2% from its peak to its trough!

Yet, when we look at gold in GWDs against the true prime rate deflated by the FRBU deflator, we see a strong relationship.

True gold prices closely follow the true prime rate. Where true gold crossed the true prime is when the banking crisis of 2008 hit. And while Fed Res bankers have kept true prime flat since 2009, gold has been falling.

Looking back to the first chart, we see that when Greenspan kicked in inflation of the credit bubble with a fury, gold traded higher in lockstep with higher true credit.

True gold rose 1.54 times between Jan 1, 1999, and March 31, 2008, from $59.24 to $150.36. True gold fell from that peak 17.1% hitting a short-term low at the end of Q4 2008 before shooting up 38.1% at the top at the end of Q3 2011. 

Between 1999 and 2000, gold rose 9% on a rise in true prime of 18.7% and then retreated 11.3% as Greenspan engaged in rate suppression. And then gold shot up thereafter following the final massive leg of inflation of the bank credit bubble.  

Between the end of Q1 2004 through the end of Q2 2006, true prime rose a whopping 108%. Gold went along for the ride fueled by cheap credit. 

The true gold price rose 28.5% from the start of the banking crisis Q3 2008 after true peak credit plateaued beginning Q4 2007.  

Since then, the true price of gold has fallen 39.4%. Where true prime goes, gold goes. Extended ZIRP of Fed Res bankers has pushed down gold from it's peak true price hit at end of Q3 2011.

The true price of gold tracks the true prime rate and its magnitude of tracking depends upon the state of bank credit.

Now let's look at gold versus black gold.

While the relationship isn't exactly a love fest, West Texas Intermediate, though volatile by comparison, seems to hint the way of gold.

So, unless Fed Res bankers lose their minds, again, its not likely that we shall see another Greenspan-Bernanke credit bubble for years, perhaps decades. 

In the short-term, when Fed Res bankers return setting the Fed Funds Rate in relation to the "normal" state of affairs, and thus when true prime rises, gold might hitch a ride and thus as a short term speculation play, there might be profits. 

However, it's likely the gold play of 2001 to 2011 was one of two-in-a-lifetime chances to profit substantially from gold.

No comments:

Post a Comment