Gold & The Business Cycle

Gold can act as “a fear indicator” rising to highs during times of conflict. At those times gold become regarded as the safest kind of money, and it takes over from bonds as the receptacle of risk avoiding capital flows.
So gold can move opposite to bonds and the same direction as late stocks … a good amount of the time. But the rest of the time it can move in a different way, to reflect the cycles of war and disruption which sweep mankind.  Oil tends to rise in those times too, so at those phases gold would correlate with the price of oil more than usual.
Let’s look at the same asset classes, but in real life situations.

Save $500/box Over the US’ largest bullion dealer on San Francisco Mint Silver Eagles-
In Stock Now at SDBullion.com!

 

By Argentus Maximus, TFMetals Report:

Here is a simplified graphic representation of The Business Cycle:

We can see how bonds do well during deflation, making their highs in the business cycle low. Stocks do well after the recession low passes, and commodities do best as inflation if peaking.

There is an overlap within each asset class of Course. The stocks phase begins with bond-substitute defensive type stocks, which pay a dividend, highly valued during recessions. But the best performance soon rotates over to cyclical stocks, and then to growth stocks, and finally into high flyers, which tends to include some fresh paper, IPOs and junk as the market takes it’s percentage of loose money.

Likewise, bonds are more or less risky, and corporate bonds do best at a different phase of the bond bull from eg sovereign bonds which are reputedly safer, but pay a lower rate of return.

So where is gold in all this?

I prefer to regard gold as occupying the place between “late” stocks and “early” commodities. In other words, a leading commodity. That reflects gold’s perceived function as an inflation hedge.

If only it was all so simple! But it isn’t!

For example, gold can act as “a fear indicator” rising to highs during times of conflict. At those times gold become regarded as the safest kind of money, and it takes over from bonds as the receptacle of risk avoiding capital flows.

So gold can move opposite to bonds and the same direction as late stocks … a good amount of the time. But the rest of the time it can move in a different way, to reflect the cycles of war and disruption which sweep mankind.  Oil tends to rise in those times too, so at those phases gold would correlate with the price of oil more than usual.

Let’s look at the same asset classes, but in real life situations.

First the rotation from bonds to stocks :

Notice the times, marked when a top of bonds preceded a following top of stocks several months later. In fact, at these times when the stock market finally made it’s high, bonds had fallen so much that their first bear market low was already visible. This seems to confirm a rotation of capital from bonds into stocks, while also admitting that it is a minority of all the highs shown which demonstrate what is happening.

Case “E” in the chart above remains to be seen how it will work out.

How about rotation from stocks into gold?

During the 1970s the S&P (red) bottomed before gold. And at the 1987 crash it topped before gold. The 1982 low in both SPX and gold was at the same time. Other turns do not reveal anything.

How about later?

From the 90s to the 00s we see a different picture. In 1995 stocks (SPX in red) began to rise fast. This upturn decoupled from gold, which after the expected delay turned down, instead of up. In 2001 stocks topped and subsequently broke down, and a period later gold made it 2nd low, continuing the inverse correlation, but retaining the lead-lag relationship between the two.

In 2002 they recoupled, and both rise. In 2007 the SPX topped and turned down. Several months after the S&P gold made it’s high, and broke down into a decline.

And more recently – with a change from monthly to weekly timeframe in the timescale this is what we see:


End of Year Blowout! 2013 Silver Eagles Only
$3.49 Over Spot ANY QTY at SDBullion!
*While Supplies Last!

 

The S&P made high in March 2011, continuing it’s role as “leader”, and gold went on to make following highs in August and a September 2011 high before breaking down. The gold lows in mid 2012, and the high in late 2012 were all preceded by the SPX.

But at end of 2012 the correlation reversed again, and the SPX moved up, with gold sinking. This has happened before.

The question arises as to causation and origin of these reversals in correlation between US stocks and gold measured in US dollars.

Before getting tied up in that, it might be a good idea to first compare gold to bonds and see what is to be seen. I’ll skip to the last one and get to the point:

And it really appears that gold (green) is, in recent years, leading the TBond (blue) by about a year. This is interesting.

To sum up: a significant portion of the time, bonds lead stocks, stocks lead gold, gold leads bonds.

Occasionally the correlation between eg stocks and gold reverses direction, but the lead-lag relationship stocks. Not every turn is a significant turn for these purposes.

Right now, gold is leading the TBond downwards, and running about a year ahead of it. The TBond which leads stocks is going down (monthly basis) but stocks have gone in the opposite direction.

The implication might be that doing what it takes in supporting stocks is hurting the TBond.

That’s an interesting thought and it might be giving headaches to the-people-who-like-to-consider-themselves-in-charge. How far things can be stretched is always a tough question. But I think at CB level there might be a wakening acceptance, that they already know the answer, and every time they have new bonds to sell a reminder is served by the bond market. Playtime is coming to an end could be the message.

A last observation: while the anti-correlation is running, gold and stocks will probably retain their lead-lag relationship, inversely. We see to have gotten caught in a time warp operated by Central Bankers and it looks like we could be in the year 2000.

If the correlation was to go normal-wise for the coming year or two we could get something like this:

I have not gone into the geopolitical situations which pertained during the reverse correlation times, and that would be worth following up at a later stage. The conditions for reversal and return to normal of the correlations are also not investigated here, but worthy of looking into.

Argentus Maximus

 

The Silver Bullet Silver Shield Consumerism (Santa Slave)
& Peace on Earth medallions are available now at SDBullion!

Consumerism Proof  Peace on Earth PROOF

Comments

  1. There is way too much attention now given to Gold and Silver manipulation. The time for a truly free market in Gold and Silver may be close at hand. The Gold and Silver market was at pretty much a standstill today and the London fixers may know that the crude twice a day AM and PM price fixing events are now on radar. Let’s hope and possibly the end will come sooner than we had hoped!!

  2. The manipulation issue to very complex and hard for me to understand.  I believe there are many sources of manipulation.  The Exchange Stabilization Fund does this legally.  They do it as a way to protect the dollar.  When the banks and hedge funds do it it is mostly likely just to profit from the trade.  I have no idea why an entity like the ESF would want to push the prices any lower than they are now.  I don’t believe that what the banks and hedge funds are doing is legal.  Maybe they are feeling some pressure from the Fed to lighten up.  The Treasury Dept does not gain anything by pushing gold down any further.  In fact, I believe they realize that lower prices only speeds up the transfer of phyzz from West to East which is not in our best interest.  On the other hand, higher gold prices will only spur Western interest in gold.  They are between a rock and a hard place.  It appears that gold price stabilization is what the Exchange Stabilization Fund would like to see.  If they can make that happen no one will want to own gold except the East.  Even that strategy has a shelf life.

  3. I’m with you on that PK.  My only questions are WHEN?   and HOW HIGH?
    All this talk about  fear indicators, I wanna know where the sumbitch lives 
    I’ll scare the living beejesus outta him. 
    Have gun, will scare.

  4. Admiral Sprott says next year will be our year. Supposedly he has his money where his mouth is.  Lets hope he is right.

  5. Gold can act as “a fear indicator”…”
     
    Does it irritate anyone else when people talk on TV, radio, or in an article about associating gold with fear?  It does me.  I buy gold from time to time and it has ZERO to do with fear.  I suppose that it does for some who do not really like gold or silver and only use it as a temporary refuge from the problems inherent in their typical stock, bond, and currency haunts.  Gold is not like that for me.  I am not in it because I am running away from something else.  I do not buy gold because I am afraid of what might happen.  I buy it because of what I know IS happening in economics and finance these days.  It is part of my asset allocation / diversification plan.  It is financial insurance.  It is a hedge against the inflation that is occurring at the consumer level.  It is not my major financial asset, nor will it ever be.  But it is an important one and one that does not correlate well with stocks or currencies.  That lack of correlation gives it additional value as a balancing force in my investment portfolio.  I also like oil, gas, and food, water, and building products commodities.  Practically everything in life is about balance and not about bingeing out on all-or-nothing bets of any kind.  So too is investing.  The keys here are to make money, preserve wealth, and not lose our shirts while trying to do all this. This is a difficult process but then, most things that are worthwhile in life are difficult.
     

Speak Your Mind