March 17th, 2011

The Gold Value of Commodities

In a piece entitled “Gold: The Next, Last Bubble” from about a year ago, I wrote

“The rise in the price of gold didn’t start last month or last year. It really started to run (see chart above) about the same time as the US deficit started to balloon due to the recession following the DotCom Bubble Crash and 9/11. Rather than slowing down, the worldwide financial crises and recessions could accelerate the rise. Consequently, gold now has characteristics similar to the objects of earlier bubbles with two exceptions: its demand is worldwide and governments could stop it by agreeing to fix currency exchange rates fixed to gold”

Since that post, GLD has risen another 16.5%, nearly twice the 9.83% growth for the S&P 500. But I like step back and look at a longer-term picture (click on images to enlarge):

This view clearly shows the dramatic increase in the price of gold (GLD) and silver(SLV) in $US since April 28, 2006, the date each index begins and was set at 100.0.

It’s often been said that the decline in the exchange value of the $US is one of the main causes for the rise in commodities and precious metals. However, of the same period, the index measuring the exchange value of the $US against key trading partners (DXY) has been relatively stable:

Precious metals, especially gold, is considered a store of wealth, one that is supposed to the global currency into which all national currencies can be freely converted. If a national currency, like the $US or the Euro changes its value relative to other currencies due to that countries monetary policy, citizens can buy gold with their currency and may, in the future, sell that gold at the currency’s new value. If the $US has remained relatively unchanged over the past several years when measured in terms of the basket of other currencies then the price of gold will have gone up in price approximately the same amount when priced in each of those other currencies.

So what has happened to the price of the stock market, oil and commodities when priced in the universal medium of exchange, gold, rather than $US:

What is striking is how little change there’s been in stocks (as measured by the S&P 500), the prices of oil (USO) and other commodities (DBC) when priced in terms of gold since the end of 2008. With all the discussion about food shortages and increased demand for oil and other demand for commodities, the price of commodities hasn’t been reflected in their prices when expressed in terms of the gold.

Either these prices haven’t been pushed up because there actually aren’t any supply/demand imbalances or the price of precious metals, that universal currency has been devalued and inflated. That’s why I sold almost all my precious metals. I believe there has been a bubble in precious metals, one that has to come back into a more realistic relationship with other hard and soft commodities.

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  • Anonymous

    Are you stating that you based your decision to sell on some factors other than technical analysis?

    Seems like the Gold chart is posting higher highs and higher lows. I do not have a position in the metals, just curious.

  • Joe

    After being out for a couple of months,I just added back a very small position in GLD …. less than 3%. I would quickly dump this on any move below in GLD below 134.

  • Anonymous

    Guru,
    Like your S&P 500 priced in Gold chart .

    Do you have same chart for 40-50 years ?

  • Joe

    I don't but I just downloaded gold prices on a monthly basis going back to the '70's and will assemble it and will post the chart on the Facebook page.

  • thisguybc

    When was the last time gold was at $350?

  • Joe

    Gold was last at $350/oz in July 2003

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