Bloomberg’s chart of the day shows gold’s performance compared to other precious metals. As you can see the performance has been poor in relative terms compared to other metals. Of course, when compared to most other assets, gold has been an outperformer over a 1, 3, 5 or 10 year period.
Click for larger image
Gold tells a very important story in this whole credit mess. As long as investors continue to demand dollars as the global economy de-leverages it is likely that gold will go nowhere fast. Inflationistas need to understand that the velocity of money must pick-up before inflation becomes a real threat. The consumer borrowing and spending figures do not back this inflationary thesis. The investment community seems convinced that inflation will run wild at some point in the coming years, but that assumes that all of this liquidity will somehow make its way into the economy. So far, we’re not seeing the catalyst for that. As far as a fear trade I still like the Yen over both the dollar and gold.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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I’ve read theory & history that argues gold’s relative performance (gold /silver ratio, or what have you) during a “boom” will be poor but it will out-perform during a “bust.” (Various political calamities &/or QE announcements notwithstanding.)
Looking at your chart, it might be useful to add the S&P500. I read the current on as saying gold did “relatively” well as the market declined (with some lead time) but mostly underperformed during the market’s 8-week run-up. If there is a similar “leadtime” at work today, the chart might be suggesting the S&P500 has topped & getting ready for another leg down.
Cullen Roche
I’m not saying that gold is or has been a bad investment (though I can see how the chart would imply that) – I am more interested in golds performance when compared to other assets. Most importantly, the function the dollar is playing here. As long as there is increased demand for dollars due to de-leveraging its likely that the inverse gold dollar correlation will keep a lid on gold (though that doesn’t mean it will go down).
ejack
Can’t inflation be caused by a rapidly declining dollar as well? If the US loses the world’s confidence, ex. losing AAA status, then a rapid decline of the US dollar could cause inflation as well.
Cullen Roche
America burns, the whole world burns. Our reserve status is probably the only thing that kept us from falling off the edge of the cliff in Q4. The rest of the world can’t afford for USA Inc. to go down in flames. That’s why it won’t happen.
ejack
I don’t agree. People are remarkably resilient especially when money is concerned. It may cause short-term turmoil, but people adapt pretty easily. I’m not sure what the world’s opinion was when the US moved off the gold standard, but I imagine there must have had doomsday predictors as well. I think the world would survive well enough without having the US dollar as the reserve currency. If anything, some countries such as China and Russia would relish the opportunity and would probably broker a deal to provide the financial stability in order for countries to transition quickly to that new reserve currency.
ejack
BTW, I’m not saying you’re wrong. I think the high probability situation is as you describe. But given the fact we’re living in very strange times, these “6th standard deviation events” seemed to have occurred a bit too often, so who knows what could happen. I’m not a gold bug, but I do have a lot of investments in GLD, protected with puts just in case.
Cullen Roche
China suffers more than anyone if we go down. Our economies are interlocked. We have actually played a brilliant game of global chess here by forcing them to be dependent on our debt. They have no choice but to buy US denominated assets. They would go down with us if we fell off the cliff. Won’t happen. I’d put the probability at less than 1/10th of 1%.
timiacono
Gold was also a bad investment since 1980, however, since 2000, it has outperformed just about every other asset class with the notable exception of gold stocks. Pick your timeframe and you can make any argument you want, but, in the scheme of things, the four and a half months are meaningless. It’s nice to see that there are still plenty of people with a profound disdain for the stuff, a clear indication of a huge upside yet to come.
Cullen Roche
I never said gold had performed poorly as an investment. I said it had performed poorly relative to other metals since the year began. Gold has been a fantastic investment over the last 10 years.
timiacono
Funny, I don’t remember seeing “Of course, when compared to most other assets, gold has been an outperformer over a 1, 3, 5 or 10 year period.” when I left my comment. Either I’m getting old or you just did a big Blogger no-no.
Cullen Roche
I’m not sure where you’re going with this conversation. No one ever knocked gold. If you are trying to start an argument you’ve picked the wrong person….I could care less about golds performance.
Erik78
Great post TPC….
The miners to me look ripe for a swing short here into next week (jmo)…
Nick P.
A picture may be a thousand words, but it is still just a snapshot of a brief point in time. For example, the above chart is basically showing a run up from a price collapse in each of the metals above except Gold.
Palladium has suffered a 73% drop in price from peak to trough, PL a 67% drop, SI a 62% drop. GC had a 33% drop.
From the first trade day of 2005 GC is up 116%, SI 67%, PL 17% and PA is down -6%.