Wednesday, February 10, 2010

Gold During Deflationary cycle

Essay from Joe: There are two camps of deflationists, the ones who understand value of Gold and then the unaware ones. The second camp argues that since all asset classes have trended together and trended against the US$, all fall in a deflationary period. This is the correct view when we look at very short periods of time like July to October 2008. However, in the larger picture Gold performs very well on a relative basis in a deflationary and hyper-deflationary period. It outperforms as other asset classes tumble and more importantly, it is the first asset to recover during deflation. Many seem to forget that the entire precious metals sector performed very well from October/November 2008 to March 2009, while non- precious metal stocks continued to fall and other commodities were trying to find a bottom, go and check what physical Gold and silver along with Gold stocks did from October/November of 08 till March of 09 when rest of the market was bleeding. Furthermore, the US dollar doesn’t have to decline for Gold to do well, for that period precious metals were up and so was the dollar. Did you know that since the very end of 2004, the US$ is flat but Gold is up 143%? Since July 20, 2007, Gold is up 56% while the dollar is flat. Since early September 2008, Gold is up 35%, while the dollar is up 1%. The majority of deflationists have been dead wrong on Gold and will continue to be wrong.
There are two periods in which Gold does well, one during inflationary cycle and secondly during deflation and hyper-deflationary cycle. Gold is a hedge against inflation and it's used as safety net against deflation after initial drop of 20% to 30% for the physical. Take a look at what GG, ABX, SLW, SSRI, AUY, KGC, and GFI did between October/November of 08 and March of 09 while rest of the market was taking it up the rear end. After December 2nd 2009 Gold stocks have been in the bear market and they have shaved about 30% from their 2009 highs so far, while physical Gold is down 15% ( high of 1229 set in December 2nd 2009, low of 1049), this correction is in line with how precious metals behave right before the rest of the market goes into deflation, in a severe deflation, initially top Gold stocks can lose up to 75% of their value from the highs ( extreme case), but turn and quickly recover while rest of the market bleeds. In October 24th 2008, Gold hit the bottom and closed at 712.50 ( 30% correction from high which during the time was around 1000), DOW was at 8378, and S&P was at 876.77. In March 09 in which overall market was at its lowest, DOW around 6400, and S&P at 666, Gold was at 936.


http://www.usagold.com/reference/prices/2008.html

http://www.usagold.com/reference/prices/2009.html

http://finance.yahoo.com/q/hp?s=%5EDJI

http://finance.yahoo.com/q/hp?s=%5EGSPC

11 comments:

  1. Good essay Kli, people really don't seem to realize that when they call for gold $650 the Dow would be on it's way down to 5,000 or less by then. For any scenario short of P3 you'd be lucky to get gold under $1,000 and in P3 you'd be lucky not to get your shoes stolen waiting in line for soup. It could be worse though, we could be Europe.

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  2. Morla,

    In March 09 when DOW & S&P 500 were at their lowest, 666 for S&P and 6500 in DOW, Gold was around 900, so DOW at 5000 does not mean Gold at 650.

    palmer

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  3. In fact the next time the SnP is 666 Gold may be at 3000

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  4. I think Morla's point was that whatever decline people may anticipate in gold, the decline in equity markets will be much more severe ...

    wolfsonite

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  5. and the story of 2008 was that commodities followed the bear market in the initial deflationary declines, but then decoupled as full edflation set in ... that makes gold like a strangle play that pays off equally well in highly deflationary or highly inflationary times

    -wolfsonite

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  6. All,
    I just updated my essay, see the last two sentence and the links in my essay.

    palmer

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  7. Well I said the Dow would be "on it's way down" to 5,000 or lower by then.

    Gold would feel the pain more sharply/quickly but there'd be much more total pain for stocks. Corporations can go bankrupt, minerals cannot (note that paper is not a mineral).

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  8. Paper, no matter what's written on it, can go bankrupt. Very, very bankrupt.

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  9. Do I have to even open my mouth on this post.

    Oh you stagflationists.... You are finally getting it....

    Dny

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