A Dip in Gold

As my 8-year-old says after a good tumble: “We’re OK.”

The 3rd floor of 808 St. Paul St. shook during the quake. The floor felt like it was floating on water for about 30 seconds. The light fixtures hanging from our ceiling swayed about a foot in either direction.

In the next room, via a concurrent Skype conversation with a colleague in Philadelphia, we witnessed the quake ripple its way up the coastline.

For a while, there were rumors the Washington Monument was starting to tilt 30 miles to our south.

Relax. It’s an optical illusion…

We were looking forward to at least one episode of The 5 rife with analogies between the national debt debate and the great East Coast Quake of 2011. Alas, the structure is sound, but for a crack inspectors did find at the very top.

The last time a bigger quake was registered in the mid-Atlantic was 1944.

You might be forgiven for thinking the quake did far more serious damage to the price of gold.


The price had already drifted down from $1,900 in overnight trading, and then staged a brief rally that vaporized within moments of the quake at 1:51 p.m. EDT.

It dropped $40 in the following two hours.

The thumping continues today. At last check, gold was down to $1,780. That’s still a level unseen before this month. Among the contributing factors: The Shanghai Gold Exchange raised traders’ margin requirements. Now there’s speculation the Comex here in the United States will follow suit.

Still, whoever thought $1,780 gold would be a chance to buy on the dip? (Ahem)…

“Gold is due for a correction,” wrote U.S. Global Investors chief and Vancouver favorite Frank Holmes on Tuesday. “In fact, it would be a nonevent to see a 10% drop in gold.”

But commenting on the long-term trend, Frank figures we’re only two years into a long cycle in which gold will run ahead of the S&P 500.


“This chart from Gold Stock Analyst,” says Frank, “pits the performance of gold bullion against the S&P 500 since 1971 — you can see that gold immediately rallied following Nixon’s announcement [cutting the dollar’s last tie to gold] before peaking at $850 an ounce in 1980.

“At that price, one ounce of gold was 7.6 times greater than the S&P 500, according to Gold Stock Analyst. Gold’s relative performance then declined for the next 20 years, with the S&P 500 taking the lead in 1992 and peaking at 5.3 times the value of gold in 1999. Currently, gold’s value is roughly 1.6 times greater than the S&P 500.”

“What drove gold’s relative underperformance from 1980 to 1999?” Frank goes on. “It was a shift in government policies, which have historically been precursors to change.”

In this case, it was Fed chief Paul Volcker’s pursuit of positive real interest rates… where money you tuck away in a Treasury note or a CD will earn you more than you lose in inflation. That finally came about in 1992… the same year the S&P 500 overtook gold on the chart.

Now? As we’ve talked about before, we’re in an environment of “financial repression” — where interest rates get eaten up by the cost of living, and then some. That’s bullish for gold.


Addison Wiggin,
for The Daily Reckoning

The Daily Reckoning