Gold has performed poorly of late. There is no denying that. In fact, the monthly average price of gold based on the London PM fix at the end of October 2008 had fallen to $806.58. That is the lowest monthly average price since December 2007, when it was $804.53. More importantly, the monthly average has fallen to test the 20-month moving average, which, at the end of October 2008, stood at 797.27, a mere $7.26 below the monthly average. Since the gold bull market began in 2002, you can see from the chart above that the monthly average bounced off, or “tested,” the 20-month moving average at least 4 times and then proceeded to move substantially higher. On a couple of occasions in 2006 and 2007, it came close to the 20-month average and then registered big gains. Will it happen again? Will gold successfully test and bounce off to another new high? Time will tell, but whether it does or not, we are hard pressed to come up with a better place to put your money. Name any commodity that has performed better than gold. Some ETFs or some short funds perhaps have done better. But certainly none of the major stock indexes have performed better than gold.
Gold has performed better than commodities in general. I like to remember when Jimmy Rogers told me on several occasions that lead would outperform gold. I don’t track lead but I’m sure it has not outperformed gold over the past six months given the demise of the commodity markets over the past year. What I do know is that gold has beaten the pants off of Mr. Rogers’ commodity index since we started tracking our Inflation Deflation Watch (IDW) back on January 31, 2005. Check it out in the chart below. On January 31, 2005, one ounce of gold would buy only 14.78% of a unit of the Rogers Raw Materials Fund. As of October 31, 2008, an ounce of gold would buy 24.43% of a unit of the Rogers Raw Materials Fund. Gold has skyrocketed against this broad based commodity fund as deflationary pressures have come to dominate the financial landscape during September and October of this year.
What about oil? How has gold performed relative to oil? Check it out below.
On January 31, 2005, an ounce of gold would buy 7.05 barrels of oil. Now an ounce of gold will buy 11.43 barrels of oil. Gold has gained a full 62.13% relative to oil. True, at the start of 2007 one ounce of gold would have purchased slightly more than 12 barrels of oil. That was when the price of oil was $56.31 and gold was $605.10.
Of course we absolutely believe the GATA folks are right in arguing that the widely quoted price of gold is manipulated by the gold cartel, way below the true market price more accurately provided on eBay. But even using the manipulated paper market price of gold as opposed to the physical market prices, gold has gained enormous purchasing power and most of that has come during the horrendous deflationary credit market implosion. In other words, gold is behaving in a way we think it should. It is the “go to” monetary metal, bar none. In fact, gold has gained vis-à-vis silver as well, silver being an industrial metal as much or more than it is a monetary metal. Gold buys 24.53% more silver now than it did on January 31, 2005, when gold bought 62.82 ounces of silver. Now an ounce of gold will buy 78.23 ounces of silver.
Relative to copper, silver has held up better, suggesting to your editor that silver is more of a monetary metal than copper. As such, it has held up better than copper during the deflationary implosion, but not as well as gold. On January 31, 2005, an ounce of gold would have purchased 283.24 pounds of copper. As of October 31, 2008, it would buy 399.78 pounds of copper. Gold buys you 41.15% more copper now than when we started our IDW back on January 31, 2005.
It’s also hard to make a case that stocks have been a better bet than gold. Check out gold vis-à-vis the S&P 500 on your left.
On January 31, 2005, when we started our IDW, an ounce of gold would have purchased 37% of a S&P unit. At October 31, 2008, it will purchase 84% of the S&P 500.
We could show an even more convincing valuation against some other sectors of the equity market, such as the home building stocks or the auto stocks. But I think we have shown how well gold has performed vis-à-vis nearly everything else during this deflationary credit implosion that is now threatening to take us down into the deepest deflationary depression since the 1930s and perhaps something much worse even than that!
What about gold stocks? If gold has performed so well, why have gold stocks not followed?
Writing in his Pivotal Events dated Thursday, October 23, Bob Hoye noted that the current market for gold stocks is looking almost identical to how gold stocks behaved during the 1929 stock market crash. Bob, who is known for his savvy as a market timer, suggested it was time to begin buying gold stocks.
Are We Nearing a Bottom for Gold & Gold Shares?
So far so good as far as Bob Hoye’s forecast of last week is concerned. As the TSX index shows for the week ending October 31, 2008, gold shares as measured by the TSX Gold index turned upward. However, I would be the first to admit the chart on your left is not terribly convincing that we have seen the lows. A follow-through to much higher levels would certainly be helpful. But given the economics of gold shares in a deflationary environment, we do think the table is set for a major rise in gold shares. Even though the economics of gold mining has improved over the past month as the markets imploded, these shares have been trashed along with everything else. We think improving profit margins at a time when gold mining shares have been absolutely decimated, including those that are either in production or planning to start up production in 2009, provide investors with an opportunity that can only be described as one of the most golden opportunities in the history of gold mining.
Certainly central bankers are trying to re-inflate our monetary system. We Watch the global U.S. dollar liquidity measure as outlined by Charlie Clough of Merrill Lynch a few years ago and it is exploding to much higher levels, as the chart below illustrates. So far, most of the money pumped into the banking system has stayed on bank balance sheets in the form of U.S. Treasury ownership. However we have recently seen a sharp rise in M1 Money Stock which may be indicating a tipping point from the deflationary pressures. If so, the next threat could very well be much, much higher rates of inflation as the Fed’s money base which is now growing at an alarming 341% annually is expanded by up to 10 fold through our fractional reserve banking system.
In either event, gold mining shares should fare very well from their currently depressed levels. In particular we are exceptionally bullish on a handful of newly emerging Canadian based junior producers that are selling a one or two times projected cash flow and in some instances for less than the cash value of their balance sheets.
Jay Taylor is editor of J Taylor’s Gold, Energy & Tech Stocks weekly and monthly newsletter. Jay provides stock recommendations with a major focus on the mining and energy sectors and also provides strategies designed to profit from major trends. Visit (www.miningstocks.com) for more information and/or call Claudio Bassi in Jay’s office at 718 457-1426 Monday through Friday between 9:00AM and 4:00 PM Eastern time
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