- The gold price in terms of real assets, meaning other commodities, was at all time record highs until Friday's pullback.
- Gold priced in real assets since 2008 shows that tops have not led to lasting corrections in the dollar price of gold. We'll see what happens this time.
- Gold may be at a top in real terms, but its dollar price may stabilize as it corrects in real terms. Support is holding for now at the 50DMA.
- More likely, commodities are about to get more expensive, thus bringing the gold price in real assets relatively down.
- This makes sense in the light of the coronavirus shutting down global production and central banks looking to ease further.
When we think of the great gold bull market of the past nearly 20 years, we almost always think of it in terms of the US dollar. Myself included, and I am no fan of the US dollar at all. True gold bugs know the key pivot dates very well. Most of us even know the prices of the tops and bottoms. 2001 to 2011, $250 to $1,923. Then a four year bear market until the December 2015 bottom at $1,045, and now four years later we're back at $1,630 or so.
We all know the chart. It's been burned into our minds, some of us for 20 years already. We remember the relentless slog higher for 10 years, the scary but short pullback in 2008, the stomach-wrenching fall in 2013, the weary trip down to a bottom in 2015 followed by a six-month slingshot back up. Then the boring 3-year sideways churn, and finally the breakthrough last summer.
Now allow me to blow your mind just a bit and insist that this chart is all wrong from a true hard money perspective. If we insist that the dollar is just paper with no intrinsic value, then we should stick to our word and we should not be measuring gold in dollar terms, at least not primarily. While that measure is useful for trading and measuring your dollar gains/losses/savings, and admittedly it does telegraph an important signal about relative faith in fiat currencies and the dollar reserve standard, the dollar price of gold should not be the primary measure for gold, and certainly not the exclusive one. Nor should the measure in any paper currency.
If gold is indeed money itself and financial assets are actually inflated and distorted in fiat paper terms, then gold should really be measured primarily against real assets, those being commodities generally, stuff that people actually need in and of themselves. If we measure gold this way, then gold's price action since 2001 looks completely and utterly different. Check this out. This chart takes Friday's selloff into account.
This is gold measured against the S&P GSCI Commodity Index. The associated ETF is (GSG). From here we can see several things that turn gold's bull market almost completely inside out and upside down. It's still clearly a bull market, yes, however many key features of it are completely inverted and weird, at least if you're coming from the perspective of a dollar yardstick. Here are four of the biggies:
- Gold's bull market did not actually begin in 2001. Rather, it began on the eve of the financial crisis in June 2008. In real asset purchasing power, gold more than tripled in the space of just 8 months as the financial world was in complete chaotic collapse.
- By implication, gold's "correction" or "selloff" initially during the 2008 crisis was no correction or selloff at all. It was actually a raging rally.
- Gold did not top in 2011. It actually topped in real asset purchasing power precisely at the time that it was bottoming in dollar terms in early 2016. Wrap your head around that one. It can take you for a real loop.
- Gold only recently reached brand new all time highs in real asset terms just before Friday's massive selloff. The rally since February 18 has produced the most extreme gap up in gold priced in terms of this commodity index ever recorded, followed by another gap up on February 27. It didn't take long at all for that last gap to get filled on Friday's massive gold selloff. Let's zoom in to the end of that chart to see it more clearly.
What does all this mirror-universe gold market stuff tell us exactly? In the most basic sense, it tells us that gold is very expensive in terms of real assets, and that a correction is probably imminent and looks to have already started. However, here's the interesting thing. This may not mean that gold is about to fall in dollar terms, notwithstanding Friday's selloff. There is a chance that in dollar terms, the correction may already be over, or mostly over. Why?
Consider the last three major gold tops in real asset terms. These were on February 17, 2009, February 8, 2016, and just this week (if indeed this is a top, which looks likely given Friday's selloff). When gold topped in terms of other commodities in 2009, gold was at the dollar price of $937. There were still about $1,000 of space to go until the final dollar top in September 2011. Even the gold/dollar bottom in late 2015 was still higher at $1,045 by 16% than the real asset top in February 2009.
Another way of saying this is that, judging from the long-term chart of gold priced in real assets, gold may very well not be about to fall in dollar terms for much longer. Rather, commodities are more likely about to get more expensive, causing the gold/commodity ratio to fall sharply from record highs from the commodity side.
It will be very interesting to see what gold does this week and next in both dollar and commodity terms. In dollar terms, Friday's selloff in gold was stopped at the 50DMA, and gold stocks actually held up pretty well at least during the peak of Friday's selloff. As we can see from the chart below, gold stocks (GDX) collapsed at around 10:30am, but gold bottomed in the afternoon. We saw recovery in stocks in the late morning as the metal continued to sell off. Of course this is just one day and we need more data, but there is a chance that the gold-in-dollars correction has already run its course.
Does this odd commodity measure of the gold market actually work for timing gold moves in terms of the dollar? Look no further than Daniel Oliver of Myrmikan Research, who used this very argument to accurately call the gold-in-dollars bottom on December 17 of 2015, just weeks after the actual bottom on November 30 of that year.
Now, global production is in the midst of a major slowdown, by some measures worse than the Great Recession. According to the South China Morning Post for example, Chinese factory activity is at all time lows, even lower than the depths of the 2008 crisis.
Plus, central banks are once again threatening yet another round of global monetary easing. The chances of a 50 basis point cut by the Fed this month according to the fed funds futures market are currently 95% as of March 1. The Federal Open Market Committee meets on March 18.
True, demand for commodities is likely to fall given the coronavirus panic, but supply will also fall, and meanwhile central banks are stepping in to stimulate demand on the monetary side. Given all this, the chances are good in my view that commodities are about to get more expensive, including gold, in dollar terms. It's just that other commodities are likely to climb faster for now since the commodity price of gold is still near all time highs.
As for currencies, something very interesting happened during Friday's panic selling, which suggests that perhaps exchange rates between currencies won't move much on net, but in terms of real purchasing power, currencies look to be about to get much weaker across the board. More on that in my next piece.
This article was written by
I invest in the light of Austrian Business Cycle Theory and cover monetary trends for the purpose of timing the credit cycle. My marketplace service The End Game Investor helps subscribers manage the risks of, and profit from the ongoing fiscal and monetary crisis precipitated by the COVID-19 pandemic. I use gold, silver, and associated stocks and investment vehicles in a low-risk high-return setup.
Analyst’s Disclosure: I am/we are long GLD, GDX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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