GOLD , the stuff , by way of GLD

gold.june 2010

I do not like making predictions with respect to gold as, in my mind , the stuff is schizophrenic by nature and consequently seldom behaves in a logical fashion. However, just watching BNN a few moments ago there was a gentlemen stating that gold is an excellent hedge against whatever and therefore should be owned. This is blatant nonsense and not at all supported by the facts. If you run a chart of gold against , say, the S&P, you will find that when stocks go up most of the time gold does so as well. In other words ,there is generally a positive correlation which puts the lie to the notion that in times of stress when life as we know it is imminently supposed to come to an end, gold would be a good hedge. As far as being an inflation hedge this too is complete nonsense. In 1984 I inherited a number of Kruger Rands that I immediately took to the bank, receiving US$ 540 a piece for a total of about $11000 Canadian which I then used to buy a swimming pool. Recently I needed to renew the liner and just for the fun of it inquired as to what the pool would cost today – about $40.000 + or nearly four times as much! Gold should be at $2160 or higher if it held inflation. Also as it yields nothing (whereas the pool was great for the kids) the real value should be more like $3000 to $4000, it is not!

    So much for that, now more to the point, gold yesterday had a key reversal day (first a new high followed by a lower low than the day before).  Usually a sign of exhaustion  so it is possible that this is one more signal to suggest that we are already in the 3d wave of the big C wave down! Notice that the RSI and the MACD are confirming the possibility that this may be a high (for  quite a while). Looking at the CRB , or any other commodity index, it is quite apparent that none are even near their peaks of a year or two ago so perhaps gold is just the last one to peak simple because, like Pavlov dogs, most advisors cannot accept that their understanding of gold is not based on fact! A quick look at ABX (Barrick) which is, for the umpteenth time trying and failing to break its glass ceiling, tells you that stocks are underperforming the stuff itself.

Which brings to mind that other great asset, your home. From Maulding’s letter I copied this fascinating chart;

Home prices vs income

I found this of particular interest as some 40 years or so ago, I had learned that since mankind lived in caves , there was a fairly static ratio between income, household income that is and the price of a house, which was supposed to be around  3x. Houses, after all, are primarily bought for shelter/comfort and have no other use, so it is not that unreasonable to assume that , over time, there was and is a fairly constant ratio between what one is willing to sacrifice against the utility derived from the house. Notice that the ratio in the US was 4.1 on average over the period in question after having been at 5.1 So far it has dropped back almost to that level but still has a way to go. Wages in the US have not moved for at least 10 years.

Recognizing that there are circumstances that can move this ratio (level of interest rates, tax deductability of interest, capital gains, taxes etc etc. from one country to another it should still yield a little insight into our own Canadian housing market. In the GTA the average house price is presently around $435.000 and household income variously around $75.000/$100.000 depending on after-tax or disposable , putting the ratio between 4.35 to 5.8X.  I would not expect his situation to stay at these levels. At some point regression to the mean is bound to happen.

On a day that, not surprisingly, the Chinese Leading Economic Index for April was “miscalculated” by 1.4% (147.1 was revised to 145), causing a drop of about 4% in some Asian indexes the above mentioned regression to the mean may happen faster than most would expect.