Listening to Gold

As if we didn’t have enough to worry about…

The chart below illustrates a troubling trend that has developed over the last few months.   Since late October, the price of gold has trended higher (top panel of graph).  This is in defiance of several traditional relationships — gold’s move has been divorced from the general downtrend in commodity prices (middle panel, Reuters Jefferies CRB Index).  Gold’s rally clearly was not prompted by any dollar weakness (bottom panel shows a sideways US Dollar Index). 

Gold vs Other Commodities and the Dollar

Gold vs Other Commodities and the Dollar

I rarely pay much attention to gold — it’s historically been a poor long-term investment, has a negative yield due to storage costs, and has no more inherent value than a paper currency.  For decades, the goldbugs whom I’ve encountered have always struck me as a “save your Confederate money, for the South shall rise again” bunch, forever longing for a different time and place.  However, gold can be an important barometer — and it is speaking to us now.


But what is the message?  There are several possible intepretations.  There have been no particular supply disruptions, so the real key is gold demand.  Demand for the metal traditionally falls into three categories: industrial, jewelry and investment.   Unfortunately, the supply/demand statistics provided by the World Gold Council have not yet been released for the 4th quarter, so we can only speculate.  Industrial demand trends had been weak through September, and likely weakened further into the 4th quarter as the global recession deepened.  Jewelry demand was surprising strong last year, but the category is misleading as some of the demand is not for the purchase of gold jewelry as a luxury good, but rather as investment (much of the world prefers this in jewelry form — all the better to use as “flight” capital — my own grandparents, fleeing Nazi Germany, survived for a year on the sale of an emerald ring). 

The rise in gold most likely reflects investment demand (some of which spills into the jewelry category).  It should be noted that gold has been largely unimpacted by the institutional commodities-as-an-asset class fad that had such a large impact on other commodities (see this earlier post).  Although gold is a component of most popular commodity indices, it is a relatively small weight relative to the size and depth of the physical gold market.  

Buying gold for investment may have made great sense in the 3rd quarter as a hedge against a systemic meltdown of the financial system.  But in the period in question, (the chart shows 10/24/08 to 1/20/09) systemic risk was lessening.  The TED Spread, by comparison, a measure of financial system instability, fell 165 basis points over the period.  Other measures also reflect declining risk of a systemic meltdown.  So why is investment demand for gold still rising? 

The best interpretation for the strength in gold appears to be rising concerns over currency devaluation.  It may be no coincidence that the gold/commodity/dollar relationship evidenced above began shortly after the approval of TARP and the growing political consensus for a large stimulus package.  Yesterday’s S&P credit downgrade of Spain (and of Greece last week), may be the first clear indication that the global response to the financial crisis is degrading currencies.   This would be  inflationary down the road of course, but may not appear yet in the pricing of other inflation sensitive measures like TIPS due to heavy distorting factors in that market.

The proposed government remedies for the recession assume that the fiscal and monetary stimuli can be reined in as soon as inflation appears on the horizon.  From a fiscal policy standpoint, this would require politically unpalatable tax increases and spending cuts.  While the independent Federal Reserve can react more nimbly and raise rates aggressively, the Fed has heretofore had limited success in knowing when to switch direction.  At the end of the day, the message in gold’s rally may be that neither Congress nor the Fed can be counted on to show such flexibility and foresight.

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20 Responses to “Listening to Gold”

  1. DON COOK Says:

    When you said (gold)”has no more inherent value than a paper currency”, my first thought was; every paper currency ever created has finally ended worthless, while gold has always been worth something. Does that not give it some inherent value?

  2. Richard Says:

    Very interesting article, definitely made me think. However, I respectfully disagree about gold vs. any fiat currency, the US $ included.
    Counterfitting a product doesn’t bring it any value and 5000 years of history supports gold. History has never had a paper currency maintain its original value for any resonable length of time. The dollar has lost 97% of its worth since the Federal Reserve got involved. The current US dollar is not a solution for the long term, but will perhaps survive longer than most as deflation runs its course. “Paper” promises are worthless unless there is some real value/revenue supporting it – I see no support anywhere for the $’s of the world and little revenue to support most stocks, bonds, etc.

  3. Parker Says:

    Gold has become a currency instead of a commodity.

    In deflation, cash is king. And viewed as a currency, gold is the ultimate cash.

  4. C.C. Says:

    Jeff –

    It’s been a relatively ‘stable’ world – until now. Therefore, your observations regarding ‘gold-bugs’ are understandable. However, economic records (of the non-favorable type) are being smashed almost on a monthly basis. The years for such comparisons keep getting pushed further & further back into history. Signposts indicating 2002, 2001, 1995, 1991, 1982 – as indicators of previous comparisons, are being knocked down like dominoes.

    These are your ‘canaries’ in the coal mine that portend of things to come.


    That is your new commodity – rapidly becoming ubiquitous across the land. And what real & tangible asset have people relied upon for 5000 years as a ‘hedge’ against that fear?

    The ‘currency’ situation is only a fraction of what awaits. The geopolitical landscape is on a hair-trigger in many areas across the globe. India/ Pakistan, India/China, Iran, South America – all on the cusp of major upheaval. Any guess to what those powder kegs will do to the price of gold if they lose control?

    Speak nothing of rumblings for a new currency peg, sans the dollar. You can poo-poo it all you like, and get financially mowed down like a weed in the process.

    Peace –


  5. Lawrence L. Says:

    Suggest you look at gold price over the last 80 years.
    Start with the period 1928 thru 1932. Gold was priced
    at $20 per oz. Today it is $880 per oz.
    A dollar invested in gold then has become $44 today.
    Not exactly a fool’s speculation.

    During the same starting period: 1928 thru 1932,
    stocks prices were very violent. The geometric
    mean price was 127. Today DJI is 7,900 a rise of 63 times.

    Gold rose 5 % per year average over this 80 years.
    DJI rose 5.3 % per year average.

    ” Stocks are wise long term holdings. Gold is for bugs
    or nuts.” Truth is, their performance is nearly the same,
    and it is the Dow Jones that is plunging today.

    L. L.

  6. Frank Says:

    If you’re troubled by what gold is doing now, wait until the treasury bubble pops and the dollar takes a nose-dive.

  7. Bryan T Says:

    Even a five-year old can see that gold has more inherent value than paper! Paper burns, it rots away. Ever heard of spit-balls?? It can’t even resist moisture….better take a science class instead of listening to eggheads, dude. Oh, and a history lesson wouldn’t hurt.

  8. Giuseppe Spizzichini Says:

    Let me understand your position. First, you state that “Gold has no more inherent value than any Fiat Currency”, then a few paragraphs later you affirm that “Gold appears to be rising because of concerns over currency devaluation”. Now, that is a rather blatant display of lack of logic.
    If Gold holds the same value as Fiat Currency why would it rise when the other is being devalued? Wouldn’t it stand to reason that Gold should succumb to the same loss of value?
    Clearly, you are confused and possibly incompetent to speak in matters of Gold as a monetary entity. Gold is rising precisely because it is the ultimate opposite of all Fiat Currencies and, as such, it cannot be devalued by a self-appointed elite of criminal counterfeiters (Central Bankers) by simply turning on the printing press. It is the ultimate store of value and the only legitimate currency.
    I always get a laugh when unqualified people such as yourself poke fun at the so-called “Gold-Bugs” and in the same article display their inferior understanding in matters financial and monetary by overtly contradicting themselves. Have a good day!

  9. Frank Capalbo Says:

    Hi Jeff,

    Thanks for your thoughts. Several participants of the recent Barron’s Roundtable are bullish on gold as well. Here’s what Felix Zulauf of Zulauf Asset Mgmt had to say (courtesy of Bill Bonner, The Daily Reckoning):

    “My one recommendation for the longer term is physical gold. Consider the basic set-up: World economies are so weak that we are seeing government stimulation of historic proportions. At first this is deflationary, but it will become inflationary. Gold is the only currency that won’t get devalued. It will be revalued.

    “If the Fed’s liabilities had to be covered in gold, it would sell for more than $6,000 an ounce. We aren’t going back to the gold standard, but the markets won’t trust the central banks anymore. Gold is a very slow bull market… the gold market could have a shakeout in the next 6 months, and the price could fall back to $700 an ounce or below from today’s $850. But two years from now it will be a lot higher. It is one of the few commodities that held up during the forced liquidation of almost everything else.” This speaks to your concerns about chasing a train that has already departed.

    There is overwhelming evidence of widespread manipulation of the spot gold price via central bank and/or bullion bank intervention, with periodic take-downs of paper gold in support of the USD. But investors are not falling for it, as the manipulation has caused a breakdown between spot gold and physical bullion at retail, with premiums now approaching $100/oz for the latter. It seems that the smart money will not be deterred from owning gold. As Felix Zulauf mentions, there is a possibility for a pullback to the $700 area before the real blastoff, so you should have an opportunity to dollar average if you care.

    I highly recommend you check out the website of the Gold Anti-Trust Action Committee at, which contains excellent posts on gold-related subjects, as well as

    Frank Capalbo

  10. David Leddy Says:

    If gold has no more inherent value than paper money, why not just hoard paper money to protect from a devaluation? You miss the point of gold. You can’t devalue it, that IS is inherent value, that and the fact that it is portable, rare and pretty to look at. Also, a billion dollar bill and a one dollar bill are meant to have very different values in a fiat currency system. A “billion dollar” one ounce gold coin and a “one dollar” one ounce gold coin would have the same value, ie the value of one ounce of gold. Paper money’s value is decreed, gold’s is inherent. They are very different things. Oh, and yes its time to trade the paper in for the coins.

  11. David Says:

    There is a fourth category of use for precious metals. You focus on investment. But investment implies capital at risk, in search of gain. Well and good. The fourth category is old fashioned, outdated, staid, even considered silly by some. But many financial gurus will nonetheless give lip service to it. It’s savings. Savings. Accumulated wealth wich is being saved – that is to say, not put at risk. Savings are the forgotten wheel of the engine of growth. It is only from savings that true wealth eventually grows. Savings are the foundation of security, the very underpining of stability in the world. And now, as every fiat currency in the world seems to be chasing each other down the toilet in a global “race for the bottom,” where is someone to put wealth to be saved? In a currency that pays from between a negative to a pittance? Or in a solid, readily fungible, univerally acceptable form of wealth: gold?

    The current increases in gold’s value across the world’s fiat currencies (as well as the decoupling between “spot” prices and physical purchase prices) are a reflection of the growing recognition that paper fiat currencies are not for savings. Speculation, maybe. Investment? If you wish to call it that. But for savings? Right now, and for a long time to come, precious metals will be king, and of them, gold will be the universal constant.

    So, when viewed from an “investment” perspective, gold’s rise may not make sense. But when viewed from a savings perspective, it merely reflects true saved wealth, in a maelstrom of value destruction among paper fiat currencies.

  12. Douglas M Says:

    In response to Lawrence L:
    Your comparison of the Dow average to Gold is not meaningful. To say they have performed equally is very misleading.
    Gold, as a substance, is the same now as it was in ’28 to ’32. But the Dow stocks are just a list of companies that change over time. The Dow average list is not the same now as it was in ’28 to ’32. Many of the companies were replaced as they became lousy performers. Some of the companies disappeared entirely. Every company removed from the list was replaced by a better performing company. In this way, the weak ones and their losses magically evaporate so they will not be counted as losses in the stock index price. The new strong companies increase the price. This process goes on year after year, distorting the index price and severely limiting its use as a meaningful comparison against other investments, including gold.

  13. Bill Says:

    Your allusion to confederate money is illustrative of at least one important aspect of the dollar. A quick check of eBay reveals that the exchange rate favors the confederate banknote over the federal reserve note by a ratio of about 15/1. Maybe my grandfather was right after all!

  14. Don Says:

    Rome & the US will come & go. Gold will still be money . Paper currency is being abused by incompetent governments. Gold is the only honest money & even the stupid people no longer trust banks & governments. Look for gold to soar.

  15. rr Says:

    Everything that has value has value for only one reason: Someone wants it. The reason they want it is not relevant. Whether they should want it is also not relevant. All that is relevant is that someone wants it. That’s all value is.

  16. Tyrone Says:

    Why, it’s so simple. The answers you seek lie here…
    Fed Reserve Fails

  17. Vesselin Says:

    NOTHING has “inherent” or “intrinsic” value – not gold, not paper, nothing. “Value” is a subjective property – it is in the eye of the beholder, is different for the different people and varies with the time and the circumstances. Think about it this way – if you’re in the desert, dying of thirst, which will have more “value” to you – a ton of gold or a bucket of water?

    What gold has is various objective properties (rare, durable, fungible, etc.) which make it very suitable for a currency. And, unlike paper currencies, it cannot be easily inflated.

    (“Not easily” doesn’t mean “impossible”. There have been periods of time when gold-backed currencies have experienced severe inflation due to the sharp increase of the supply of gold. If tomorrow a gold asteroid weighting hundreds of thousands of tons falls in your backyard, what do you think is going to happen to the price of gold?)

  18. The Hedonistic Pleasureseeker Says:

    Central banks want you to think gold is worthless except as a relic of the past. Meanwhile, they still buy/sell it: International debts are still paid with massive gold movements. Obviously, central banks think gold is REAL money. They just don’t want YOU to know it. Think about that.

  19. Hackett Says:

    I agree with what Parker said.

    Awesome Article!

  20. Helmuth Clurmann Says:

    Idiots all. I lived four years were there was no economy. Gold will buy anything if anything is for sale. You have shoes for sale and I want a coat and you do not have a coat, you will take gold if you feel there some one out there with two coats.Only thing good about some paper monies is they are hard to counterfeit. An American Dollar in Germany in 1946 was too easy to counterfeit and their were 1,000 fake bills for every real one. The posters say if you bought stocks you would have 5.5% compounds. Yes if you are lucky. Gold will always go up and down but your only worry if you never put it a bank is to find a money changer that wil give you “legal tender” for yur gold. Gold is as od as the mountains, worms eat paper.

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