Gold Versus
Commodities
The following is an extract from
commentary that was posted at www.speculative-investor.com on 18th April
2002.
First, a quick review. Although the
gold price bottomed during the first quarter of 2001 we strongly believe
that the trend for gold turned higher in October/November of 2000. We think
this way because:
a) Gold stocks began trending higher
in November 2000
b) The US$ made a long-term peak against
the Swiss Franc and the euro in October 2000
c) The yield spread (the yield on the
30-year T-Bond minus the yield on the 13-week T-Bill) bottomed and began
trending higher in October 2000 (the failure of long-term interest rates
to follow short-term interest rates lower was a sign of rising inflation
fears).
d) The real (CPI-adjusted) Fed Funds
Rate embarked on a steep decline in October 2000 (plummeting real interest
rates are a major positive for gold).
e) The S&P500/XAU ratio reached
a 'bubble peak' and reversed lower in October 2000.
On a gold price chart we can also trace
the start of the up-trend back to October 2000 even though lower prices
were reached over the ensuing 6 months.
At the same time as the gold trend
was bottoming (October/November 2000), the trend in the general commodity
price level (as represented by the CRB Index) was peaking. The CRB Index
then spent 12 months trending strongly lower while gold trended higher.
In fact, the following chart comparison of the CRB Index and the gold price
shows that commodities and gold have spent much of the past 3 years moving
in opposite directions.
In our 25th March commentary we explained
the inverse correlation between gold and commodities over the past 3 years
as follows: "Commodity prices have, in recent years, been moving in-synch
with the overall stock market (as represented by the S&P500) and changes
in economic growth expectations - as the economic outlook has deteriorated
or improved, commodity prices have correspondingly fallen or risen. The
gold price, however, has tended to move in the opposite direction to significant
changes in the general outlook for economic growth. Later this year we
expect to see gold and the CRB Index marching higher together as they both
respond to a substantial decline in the US$." The above chart actually
shows that commodities and gold began to trend in the same direction (higher)
in October of last year, although the short-term fluctuations in both markets
often disguise this fact.
Sometimes we might be guilty of looking
so hard at charts that we see relationships that don't really exist. Having
said that there is another way of looking at the relationship between commodities
and gold that, from our perspective, makes some sense.
If we offset the charts of the gold
price and the CRB Index as shown below and keep in mind that the trend
for gold turned bullish in October/November 2000, we find that the gold
price appears to be leading the CRB Index by 12 months. If this idea has
some merit then commodity prices are going to be trending higher for at
least the next 12 months.
The reason the idea might have some
merit is that it is consistent with what happened during the commodity
bull markets of the 1970s and 1980s. For example, commodity prices commenced
a major bull market in early-1972, about 12 months after the gold price
began to trend higher. Also, gold turned higher in March of 1985, about
16 months prior to the start of the 1986-1988 commodities bull market.
It is, by the way, also consistent with all the other analyses we've presented
over the past year pointing towards a major bull market in commodities
beginning in late-2001 or early-2002.
Gold trades as money, not as a commodity,
meaning that gold competes for investment with other forms of money (the
fiat currencies of the world). As such, the gold price rises during those
periods when confidence in fiat currency (the financial system) is in decline
and falls when confidence is rising. The reason that gold tends to be a
good leading indicator of the general commodity price level is that inflation
- one of the most common reasons for a decline in confidence - often has
the effect of pushing commodity prices higher (rising commodity prices
are not inflation, they are a possible effect of inflation).
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