IS GOLD GETTING OVERBOUGHT?
In a recent piece Nomura Group highlighted some of the more interesting gold ratios with the implication that gold is bumping up against some high historically levels:
Personally, I still believe the “irrational” move in gold is very much alive and will likely find support on any significant weakness. Gold is likely to remain the “go to” asset for investors looking for a hedge to the fear and uncertainty of the current environment. The Euro is being viewed as a faulty fiat currency (incorrectly I believe) and the US dollar is believed to be in long-term disarray due to the actions of the Fed. As long as the de-leveraging cycle persists and the sovereign debt woes continue we are likely to continue to see strong demand for gold.
Source: Nomura Group
Here is another interesting question “Is government debt getting overbought?”
Someone with more time can compile some pretty interesting charts
BTW I am not a gold bug
Wait…5 montha ago you said euro is a doomed currency and now you say its not a faulty fiat.
I should have been more clear. Sorry. The Euro system is doomed in that it is similar to the gold standard. But people are using the Euro as evidence that fiat money doesn’t work. The Euro does not represent a truly free floating sovereign monetary system. It represents single currency systems such as the gold standard. That’s what I intended to infer.
For the time being (!!) I consider the Euro to be a stronger currency than the USD because the euro zone has a Current Account Surplus and the US has a Currenct Account Deficit. If (when ??) that changes then I’ll have to change my opinion as well. I DO NOT look at the (changing) Eur/USD exchange rate ONLY !
But I agree with TPC and Hugh Hendry that for the Euro-zone in its CURRENT composition the days are numbered.
I was confused as well by your statement about the Euro not being a faulty fiat currency. If you do believe that the Euro has inherent problems in the way it’s structured (not giving members monetary sovereignty and having a de facto foreign denominated debt), wouldn’t you think this bodes well for gold? Don’t you think central banks will diversify into gold out of the Euro?
With respect to these data, it’s only 20 years of coverage.
Gold / M2 Ratio
Since Gold is meant to be the purest currency, free from the constant increase in Money stock that comes with a fractional banking system, I think this ratio is as instructive as any
Yet, the ratio is now > than where it was in the 60s/ early 70s when the Gold Std was fully finished off
So basically, yes the stock of $$ has risen since 1970, but the “value” of Gold has risen more
Lets not forget that the stock of Gold also increases by 1.5-2% per year, so this ratio is actually even too generous on Gold as it assumes the Gold supply is static while the Money supply just grows. If you adjust for this 2% extra supply every year, then the ratio of Gold / M2 is only 15% from its all time high in 1980
Maybe we see 1500$$ in Gold, but I am patiently waiting on the sidelines to buy puts on this thing. In 2 years if we ever turn the corner in interest rates, central Bank quant easing etc, Gold in my opinion will be in freefall
Granted I have only used US money supply here, but its generally considered the one of the more abused Fiat currencies and Gold is priced in $$ anyway
oh M2, how about M3 with all the unfunded commitments
I look at the Gold/CRB ratio because that give an indication of the purchasing power of gold. And that ratio has gone “through the roof”" from september 2008 up to february 2009. After that, that ratio went down somewhat but it remained much higher indicating that the purchasing power of gold remained strong.