This update is pursuant to my last article on gold prices which coupled Jones' analysis of the 12 month moving average of gold prices with my analysis of the effect of real interest rates.
The CPI-U came out late this month. The 2/26 report indicate deflation of -.09% yoy. This made real short-term interest rates positive, which is bad for gold.
Last month the nominal price of gold went above its 12 month moving average, which was a buy using Jones' model, but I advised in a comment somewhere in my instablog, that it not be bought because the real price of gold was too far above its average real price (average means since 1974). Also, negative real interest rates were becoming less negative. That was a good or lucky call on my part.
As of 2/26, the London pm fixing price for gold was $1208.25, which is well below the 12-month moving average nominal price of $1266.52. So it's a sell. The real price of gold is currently 1.16 standard deviations above its mean since 1974. If it was priced at the mean calculated since 1974, that fair price would be $773.60 per oz. Coupled with real interest rates now slightly positive, and likely to rise, gold is unlikely to rise significantly in the next few months or years.
Looking back at the CPI for Feb. to March of last year, it is almost certain that we will be seeing yoy deflation reports for the next 3 months, unless oil prices miraculously rise to their former levels. In 2009 we had deflation because of the severity of the financial crisis, but now we have it with an expanding economy, and after massive QE. In 1929, the US had consumer price deflation also, and the Feds raised interest rates that year. You know the outcome. Interesting times as always. I have large bond positions with some exposure to stocks per my XLF timing position. Despite this being the third year of the Presidential cycle, which has been great for stocks since WWII, I can't see the means for the economy to rapidly expand, and thus support this over-priced, over-bullish stock market. We're in a bubble. It could inflate a lot, but this is not 1996-2000.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.