A Brief Look at the Current Gold Cycle

“History…is indeed little more than the register of the crimes, follies, and misfortunes of mankind.”
— Edward Gibbon, The Decline and Fall of the Roman Empire


Gold is off to the races!

The ultimate dollar hedge was up $15 last we checked, to a 4-month high of near $1,670 an ounce. To be sure, that’s still a ways off its nominal record of $1,858.30 an ounce, a peak it climbed shortly after credit rating agency Standard & Poor’s downgraded US debt last year. Nevertheless, it still looks pretty good on a one-month chart, up about $90. On a 5-year chart, which shows a near $1,000 increase, it looks spectacular. And on a 10-year chart, where the Midas Metal has added over $1,360 per ounce, it positively glistens.

We were thinking about our favorite unproductive asset while wandering around the Igreja de São Francisco (Church of Saint Francis), in the Portuguese city of Porto, just this morning. The building is the most prominent Gothic monument in the city, but it is perhaps most renowned for its outstanding Baroque interior decoration. Ornate wood carvings cover the walls…and gold leaf covers the carvings. There is supposedly around 450 kilograms of gold in the building, “from the days of plenty,” our host told us, no doubt referring to the 300 years when Portugal extracted Brazilwood (16th century), sugar (16th to 18th centuries) and finally gold and diamonds (18th century) from her colonial jewel in South America.

Though not exactly reversed, the roles of Brazil and Portugal are very different today than they were during the colonial days. While Brazil’s GDP chart has a distinct “hockey stick” look about it, Portugal’s more closely resembles a flaccid (non-denominational) chorizo. At roughly 6%, Brazil’s unemployment rate is flirting with record lows…while Portugal’s rate, at 15.4%, is at a record high.

At one time, Portugal was a great place to be a banker. And maybe it will be again one day. But that day is not today. Right now, it’s a great place to be a tourist.

As we’ve been saying, investing is all about cycles…both long and short. When Reckoner-in-Chief, Bill Bonner, announced his “Trade of the Decade” — sell stocks; buy gold — back in 2000, gold was languishing around the Brown Bottom…about $250 per ounce. Stocks, meanwhile, were all the rage. If you didn’t have a Pets.com-type performer in your portfolio, people looked at you askance, as if you’d just confessed to disliking the popular “music” group, Creed.

And yet, those who followed Bill’s “hunch” would have done very well at the close of the decade…when stocks had gone nowhere and gold was still very much on the up and up. (Creed, by the way, still sucks…)

Joel Bowman
for The Daily Reckoning