Gold was heading south, last I saw.
First up, a blurb from FT Alphaville:
It has become the latest – and perhaps most unlikely – sector to nourish the green shoots of economic recovery: the price of recyclable rubbish has doubled since November, outperforming traditional commodities, the FT reported. Prices for plastic and paper have surged from a dramatic crash last year, and in percentage terms have outperformed gold, crude oil and the FTSE 100.Chart from Kitco:
From Money Morning Australia:
Whether inflation or deflation strikes, a growing number of people are fast buying gold for defence…
IT’S COMMON KNOWLEDGE that gold bullion proved the most reliable wealth-store during the vicious inflation of the late 1970s. Yet almost un-noticed, gold has once again been the best-performing asset bar none this decade, too....
...Gold prices had already trebled and more against the world’s major currencies, gaining an average 14% per annum in Sterling terms since the start of 2000....
We've had a few posts on the fallacy of gold as a hedge against deflation. In "The Financial Times Sings Praise of Gold. They're wrong":
Gold is not a hedge against deflation. Over the years goldbugs have come to believe it is, based on the performance of Homestake Mining's stock during the Great Depression. Here's an example from Gold Eagle:
Gold Stocks did well during the Great Crash and aftermath… indeed exceedingly well. Please note that from August through October 1929 Homestake Mining did decline in value, but no where near the percent plunge in the general stock market. And by yearend Homestake was again creeping up in price. For the first few months of 1930 the gold mining industry proxy was relatively flat. However, from mid-year on Homestake began to increase in value as the DOW and DJUA rapidly and relentlessly melted away. During the next five years the Gold Mining Industry's surrogate soared in value - while stock prices were decimated by the Great Depression.
It is relevant to observe that Homestake's price appreciation was not a market anomaly, but was consistent with its growing annual earnings per share and increasing cash dividend payout. Yearly E.P.S and cash Dividend payout data may be seen in the above Homestake chart. While nearly all industries revenues and earnings dwindled, the gold mining industry thrived. Homestake's E.P.S. increased from $4.19 in 1929 to $32.43 in 1935. During the six desolate years of the Great Depression, the gold mining industry's proxy enjoyed an E.P.S. growth rate of 41% COMPOUNDED ANNUALLY. Furthermore, while the banks paid a paltry 1% in "earned" interest on the meager savings of those few hapless souls who still had money, Homestake share holders were indeed enriching themselves. The 1929 cash dividend of $7.00 increased to a cash payout of $56 PER SHARE BY 1935. Consider for a moment the awesome investment significance of it....
...That is rather enthusiastic and more accurate than most analyses, at least he focuses on the equity rather than the metal. But the focus is still wrong.
After the mine closed in 2002 I went out to Lead to answer the question "Is gold an asset you want to own during deflation?" I was quite possibly the last person with access to the company records from the '30's. The skeleton staff that Barrick had in place for the shutdown were literally boxing documents for the archivists as I sat there.
There were three contributors to the move in the stock price:
1) A high-grading mining strategy proposed by a young engineer, Don McLaughlin in the late '20's began bearing fruit in the form of higher recoveries. Mr. McLaughlin went on to the presidency of the company.
2) A flight to safety after the October 1929 stock market crash.
3) The Gold Reserve Act of January 30, 1934 raised the price of gold 69%, from $20.67 to $35.00 (conversely devaluing the dollar by 41%).
3a) Homestake was thus paying salaries and other expenses in devalued dollars.
This combination of more gold produced, higher price per ounce and lowered expenses (in real terms) was what moved the stock, not some inherent magic in gold.
A good explication of gold's valuation is Roy Jastram's study of the purchasing power of gold, "The Golden Constant: The English and American Experience, 1560-1976". The main point is that gold tends to retain purchasing power over long periods of time. A secondary point is at apparent varience with my conclusion. Jastram says that gold's purchasing power increases under deflation.
The apparent contradiction is resolved by the knowledge that during his period of study, gold was money. During deflation, any unit of money increases in purchasing power. No one backs their money with gold, that link is broken.
Gold will shine but not until the printing presses have overcome the contraction in credit/money.
In the meantime, if you are of a mind to invest for the Apocalypse, buy some bullion silver coins or Silver Eagles. The lower valuation should make buying a fifty pound sack of flour easier than it would be with an ounce of gold.