Friday, July 13, 2007

Some thoughts on Gold (On and off topic)

While this blog is not focused on commodity trading per se and is definitely not a gold bug hangout, partly because I am convinced by Roy W. Jastram's arguments in "The Golden Constant" summarised at the Mises Economics blog:

This seminal work rigorously analyzes the purchasing power of gold in England and the United States from 1560 to 1976, employing a meticulous methodology that:
  • constructs unified series of the price of gold since 1560;
  • constructs unified series representing the level of wholesale commodity prices in every year since 1560
  • determines the statistical relationship between these two series in such a way as to measure the purchasing power of gold since 1560;
  • analyzes the behavior of that purchasing power in periods of inflation and deflation; and
  • assesses the extent to which gold served as a hedge during inflationary periods and a conservator of purchasing power during deflationary periods.

The Golden Constant demonstrates conclusively that gold holds its purchasing power remarkably well over time. It concludes that gold prices do not chase after commodities, but rather that commodity prices return to the index level of gold, over and over, and that gold provides an effective refuge in times of upheaval.

It is a subject of which I am experienced.

On-topic: About six months ago I noticed the gold/oil correlation was acting tradable.
During a mis-spent youth I remember the correlation was about .92, pretty tight, not that interesting, better things to trade.

Here's someone else who's noticed, from the June 20, 2007 Resource Investor:

Gold-Oil Ratio Drops to Yearly Low

By Jon A. Nones
20 Jun 2007 at 05:32 PM GMT-04:00

St. LOUIS ( -- With oil prices hitting 9-month highs and gold prices trading under both the 50 and 100-day moving averages this week, the gold to oil ratio has fallen below 10 barrels per ounce for the first time since December 2006.

The historically linked inflationary measures have been diverging rapidly in the last two months, with gold down 5% and crude up nearly 8%. Gold analysts wonder if and when the yellow metal will make up the lost ground.

Dennis Gartman, editor of the Gartman Letter, a long-time trader of this correlation, remains long of seven units of gold and short of seven units of crude oil. He vows to sit tight with this position.

Source, take a look now.

Off-topic: Can anyone explain to me what the Central Banks were doing selling their gold reserves in '99-'01 at $280-$255 an ounce? I've seen lots of commentary and speculation, some conspiratorial, some paranoid psychotic, but none that was authoritative.

If you are a recently retired Central Banker who wants someone to talk to, please email.