Last Updated: 18 May 2021
It’s a rare moment when you and I agree about gold, Paul, but I think I agree with your central thesis here.
Despite rising prices, gold doesn’t feel like a bubble yet. There isn’t the same kind of mania that affected tech stocks in the 1990s or housing in the 2000s. I’ve yet to have one of my non-investment-focused friends ask me for my view on gold, and I don’t see Jim Cramer shouting “gold” from the rooftops yet.
That day could easily come. The tell-tale sign I’m waiting for is when the SPDR Gold Trust (NYSEArca: GLD) eclipses the S&P 500 SPDRs (NYSEArca: SPY) as the world’s largest ETF. Currently, GLD has $46.8 billion while SPY has $82.1 billion, but GLD has been gaining.
At the same time, I would make three caveats to your blog.
First, your long-term chart of inflation-adjusted gold makes it clear that we’re in, if not uncharted waters, at least unfamiliar territory. When I look at that chart I don’t think, gee, gold is cheaper than it was in 1979. I’m more inclined to say, gee, gold is more expensive than it’s been at any time except once in its history.
You could argue that we’re living in unprecedented times, with massive structural deficits that are encouraging countries to debase their currencies and drive up inflation. You could argue that gold could easily go higher than it did in the 1970s. I might even agree with that, although I think the short-term pressures continue to be on the disinflationary side.
But you can’t argue that gold is “cheap” any more. While we’re not in bubble territory, the “cheap” era has come and gone.
Second, correct me if I’m wrong, but looking at your Long-Term Dow/Gold Ratio, it looks like stocks are relatively cheap compared to gold right now, based on the rising gold/Dow trend line. The fact that the trend line is rising is a problem, but again, gold doesn’t look cheap by this measure.
Finally, we should remember that the dollar holds sway here. The most recent boost in gold has clearly come from European investors piling into bullion to protect themselves from a falling euro. But if gold is going to go to $1,400 or $1,600 or $2,000 an ounce, we’re going to need to see either the dollar collapse or a massive default by a major European power.
Concerning the latter point, Bespoke Investment Group has published a great table showing the collapse of sovereign CDS rates since the bailout was announced last weekend. The cost of insuring Portuguese debt fell by half, and the cost of insuring everything from Greek to Italian to Spanish debt plunged as well.
The U.S. remains the most secure credit in the world, and the dollar looks fairly solid in the short-term.
For those who are interested, Argentina and Venezuela bring up the rear on sovereign debt risk. It now costs twice as much to insure Argentinean debt as it does Greek debt. That sounds about right.