Back in May, Barry Ritholtz posted an interesting chart of the S&P 500 priced in gold:
The chart shows that the last 10-year period of gold outperformance was followed by a lengthy 20-year period of underperformance.
Not that this is indicative of anything that will happen now — small sample size and all that — but you might think it would have given the gold bulls a bit of pause.
Nope. Colin Barr of Street Sweep has an update:
Gold rose $7 an ounce to $1,258, after a series of reports raised questions about banks’ capital levels and their exposure to bonds issued by stressed nations such as Greece, Portugal, Ireland, Italy and Spain.
Tuesday’s rally takes the gold price up almost $100 an ounce from its midsummer low and just a few dollars from the June record of $1,260. It also confirms the warnings of gold bulls, who insisted during a mostly calm summer that gold’s selloff would turn around once the financial markets had to deal with another crisis. …
Meanwhile, a lot of people think gold has room to run.
Hedge funds have been snapping up the metal.
Michael Burry, famous for his subprime-shorting contrarianism, just told Bloomberg that gold is a strategy that makes sense because he doesn’t trust the Fed to get things right. Peter Boockvar has similar thoughts.
And here’s a bit of historical context, also from Street Sweep:
Despite the big numbers, gold remains more than $1,000 below its inflation-adjusted all-time high, reached in 1980. An ounce of gold fetched $873 three decades ago, at the height of the late 1970s inflation scare. Adjusted for inflation, the all-time high is $2,310.
The case for gold given by those mentioned above is that efforts to revive the economies of the developed world by debasing their currencies will eventually lead to inflation in the long-run, especially given high debt levels, which might eventually tempt governments to eventually inflate them away.
That thinking has become fairly typical, despite the current lack of inflationary signals.
And then there is Dave’s explanation for the rally, which we’ve discussed before.
“Dave”, of course, is David Rosenberg of Gluskin Sheff, who writes in Tuesday’s morning note:
Gold is up 14% so far this year as the secular bull market continues unabated. Investment demand is playing a critical role here. At the lows over a decade ago, investors represented less than 7% of total demand and according to the World Gold Council, that share has swelled to nearly 40%.
Rosenberg is an original and unwavering deflationista, so his rationale doesn’t include the typical gold-as-inflation-hedge explanation for the bull market more commonly given.
His theory has been that gold is increasingly becoming like a currency itself, and a hedge against all kinds of instability, not just USD or EUR debasement:
In other words, investors have more faith in what the shape and direction of the supply curve for bullion looks like relative to individual country money supply growth. This is why deflation is good for gold — the reflationary efforts provide a big boost. Even without the interventionist efforts to monetize the debts, as long as policy rates are near-zero, gold leasing rates will do likewise.
Another way of saying this is that investors remain scared. Given that current inflation expectations remain so low, this explanation seems as plausible as any other.
Then again, maybe they’re all wrong.
Related links:
Gold glitters on debt jitters – FT Alphaville
Rosenberg: ‘Gold is now in a bubble? Not a chance’ – FT Alphaville