Saturday, March 13, 2010

My response to a reader's response to my recent gold bashing on the blog

In response to my latest negative comments on gold, a long-time reader and friend sends me a concerned email. Among many, many other things he writes:

"> Yes. Gold's internal momentum has been waning for years. But
compared to what?"

My email response to this and a couple other issues raised in his note is quoted below.

Compared to its own price history, that's why I referred to it as _internal_ momentum. The attached PDF has a chart of gold's 'Consolidated Rate of Change' (CROC) since 2002.* The CROC is essentially the average percentage change in price over multiple periods (21, 28, 37, 49, 65, 86, 114, 151, 200, 265, 351, and 465 days).

Notice how the recent high in the CROC indicator was below the 2008 high, while the 2008 high was in turn below the 2006 high. It is on this basis that I can assert that "gold's internal momentum has been waning for years."

Now it is entirely possible that the price of the metal shoots higher soon to such a degree that the CROC negates this pattern of lower highs. But as it stands the price climbed to 1200+ a few months ago amid extreme euphoria and speculative buying on the futures market (I refer you to the COT data highlighted on the blog post) and yet was met with this blatant divergence on the CROC indicator.

The other image attached shows the performance of gold (using GLD as proxy) relative to four other markets (commodities, stocks, corporate bonds, and Treasury bonds).^ You can see that during gold's most recent advance, three of these four ratios failed to hit new highs. Only against Treasurys (proxy TLT) were new highs achieved, and even here that could be interpreted has a high 'B' within a much larger ABC consolidation.

As I wrote a few years back, a bull market in gold is in reality a bear market in about everything else. So it is hard for me to label gold's most recent spike as a renewal of a bull market when the majority of these ratios failed to hit new highs.

And it is most definitely the height of absurdity to talk of a bubble in gold at the very time we are confronted with this broad-based under-performance.

As to what you should do about your investment position, my answer is the same as it ever was, sit tight, don't change a thing. Add to your bullion position when you can afford it. Eventually, the investment stance you adopted several years ago will be fully vindicated. Just because I think, for example, that the Dow:Gold ratio can rise another 20% or so from here is no reason for you to have any concern.

Oh, and stop reading all those Precious Metals websites. They can only poison your mind. Seriously, you know the game, what possible advantage is there for you to continue reading that tripe? Go to the library and get some books. Ever read any Saul Bellow? Great stuff.



* The gold CROC chart:

^ The GLD ratios: