Gold Has Significantly Outperformed: Can This Continue Indefinitely?

Just a quick follow up from my article yesterday on gold and real estate.

In the same way that short term treasuries have been bid up beyond their true intrinsic value due to the flight to safety, so to has that lent support to gold prices. Take a look at the following chart (click to enlarge):

As silver and oil have moved down, fairly in tandem, gold has significantly outperformed. The flight to safety is obvious. Buying gold and treasuries right now is a fairly similar play in that traders are willing to accept a small expected return for the feeling of safety. The ultimate question right now is will massive inflation occur once fear subsides. With economists expecting oil below $60 and housing to drop another 10-15%, can this massive purchasing power advantage over other commodities continue indefinitely? I'll let you deside for yourself.

As I write this article, silver is down 7.5% on the day, crude a little over 4%, and gold is up 0.34%.

Disclosure: Not holding shorts overnight but trading with a bear bias

Comments

[Balderdash:]

In short, yes. Gold is retaining its monetary premium, while the industrial commodities are getting kicked in the teeth on demand worries.

2008 Oct 16 09:12 AM

[loch:]

extend that chart out about 10 years and you may reach a different conclusion

2008 Oct 16 09:41 AM

[GMiki1:]

Gold will not only hold up but will outperform, short-term behavbior as a result of manipulation notwithstanding. The author doesn't understand gold. It's not like Treasuries. Gold is a definite inflation hedge and we're going into steep inflation.

2008 Oct 16 09:58 AM

[David Lentz:]

OTOH, this morning's action in gold and consumer prices would seem to show ALL the "inflation" scare talk to be utter nonsense. We are in a full-scale deflation, and gold will plummet, just like any other commodity.

Gold is of zero value as a hedge against deflation.

2008 Oct 16 10:56 AM

[Smarty_Pants:]

Look at a long term chart. Gold is in a corrective leg of a bull market. It will eventually turn back up and break out to new highs.

finance.yahoo.com/q/bc...=

Also, do not confuse cause with effect when discussing inflation.

Inflation is an increase in the supply of (fiat) money. This increase of paper coupons chasing a limited supply of goods CAUSES increasing prices (more accurately it decreases the value of each coupon, therefore requiring larger numbers of coupons to buy the same item).

Since each coupon is worth less as the money supply expands, the 'price' of gold, in coupons, will increase over time.

If there's one point that doesn't require a degree in economics to determine it is that the supply of coupons is most certainly increasing. By the trillions.

2008 Oct 16 11:26 AM

[freefall51:]

I guess alajac expressed it elsewhere. It is not the trillions that are printed around the world. Sure that sounds scary. The core purpose of this stunt is to take (bad) subprime morgage debt off the balance sheet of banks and make the institutions solvent again or to buy equity in banks in order to spread confidence. This influx of liquidity should not to be conceived as a a gift or a freebie to anybody. The assets can be sold back over time, some may even turn into a profit. With some conservatism this may end up as a +/- zero sum game. Who would know that exactly now? It is a moot case to make a guess at this time. Better focus what is next on the way and that is economical contraction, ie deflation, ie falling gold prices.

2008 Oct 16 06:21 PM

[iknoknot:]

demand drops = assets drop in value
leveraged idiots get thumped, credit shrinks
government gets scared, prints lots of money
time goes on - feels like deflation, but safeway prices really don't drop
demand goes up = asset values come back up
government is happy, still prints money

inflation - not if, when.

hold tight.

--ikk

2008 Oct 17 06:42 AM