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Tags: gold | price | global economy | commodity

Gold: Just Another Commodity?

Gold: Just Another Commodity?
(DPC)

Dr. Edward Yardeni By Tuesday, 07 June 2016 10:58 AM Current | Bio | Archive


There are two kinds of people in the world: those who own gold and those who don’t.

Almost everyone has some gold somewhere including in a wedding ring. However, there are also gold owners (and hoarders) who vow allegiance to the metal with almost religious conviction, ’til death do them part. These so-called “gold bugs” are convinced that the shiny metal is a much better store of value than currencies.

They believe that only a monetary system based on the gold standard can keep a lid on inflation. Monetary standards managed by central banks are bound to be inflationary, thus “debasing” the values of their currencies. The best way to protect against this inevitable scenario is to own gold, the only true store of value and the best way to hedge against inflation, currency debasement, reckless central banks and their reckless monetary policies, political and social instability, and the end of days.

The shiny metal has been shining particularly brightly recently. After dropping 45% from a record high of $1,895 per ounce on September 6, 2011 to $1,049 on December 17, 2015, it rose 19% to $1,244 through Monday. It had a big jump on Friday after May’s much weaker-than-expected employment report greatly reduced the likelihood of a Fed rate hike anytime soon.

Gold may be a hedge against all sorts of adverse events. It may be a great alternative to fiat currencies. It looks great as jewelry.

However, first and foremost, it is a commodity. Like other commodities, and unlike stocks and bonds, it pays no dividends or interest. So it is very hard to value.

Like other commodities, its price is determined by supply and demand. Unlike other commodities, demand by actual users of the metal (for jewelry, for example) is relatively small relative to the demand by gold bugs and speculators.

In any event, the correlation between gold and inflation has been relatively weak. The same can be said about gold and the trade-weighted dollar.

On the other hand, gold seems to closely track the underlying trend in the CRB raw industrials spot price index, which does not include any precious metals, any petroleum products, or any lumber products. Indeed, the price of gold and the 200-day moving average of the CRB index have been good fellow travelers.

The recent rally in gold coincided with the recent upturn in the CRB index, confirming that the downtrend in commodity prices since mid-2014 is over. Now both seem to be in V-shaped recoveries. Are they sustainable? While Debbie and I don’t see much downside for commodity prices, we doubt that there is much more upside given the weakness of the global economy.

Consider the following recent news:
  • Copper price. The price of copper remains near the year’s low at the start of 2016. In other words, Professor Copper, the base metal with a PhD in economics, has yet to confirm the upturns in the price of gold and in the CRB spot price index.
  • German factory orders. As Debbie reports below, German factory orders unexpectedly declined during April by 2.0% m/m. They are down 0.5% y/y. Interestingly, non-Eurozone orders fell 8.3% m/m and 4.9% y/y.
  • PMIs. The JP Morgan Global All-Industry Output Index — which is produced by JP Morgan and Markit in association with ISM and IFPSM — posted 51.1 in May, down from 51.6 in April, signaling a moderate expansion of all-industry activity. However, the rates of growth in all-industry output and new orders so far during 2016 are among the weakest in three years. Manufacturing production was broadly stagnant in May, while service-sector activity rose at the slowest rate in three months. National PMI data showed that, apart from a few pockets of solid expansion (such as in Germany, Spain, and Ireland), most of the world’s major economies saw only modest growth at best during May, with further deterioration in the M-PMIs of Japan and Brazil.
  • TIPS & expected inflation. Interestingly, since 2006, the price of gold has been highly correlated with the inverse of the 10-year TIPS yield. This suggests that gold remains a hedge against inflation, since a falling (rising) TIPS yield suggests an increasing (decreasing) demand for protection against inflation. Since 2010, the price of gold also has correlated well with expected inflation as measured by the spread between the 10-year US Treasury yield and the comparable TIPS yield.
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research. To read more of his blogs, CLICK HERE NOW.

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EdwardYardeni
Gold may be a hedge against all sorts of adverse events. It may be a great alternative to fiat currencies. It looks great as jewelry.
gold, price, global economy, commodity
751
2016-58-07
Tuesday, 07 June 2016 10:58 AM
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