Saturday, July 14, 2012

Gold vs. All Commodities

Click to enlarge.

Surely there has to be a safer inflation hedge than gold at this point.

If you truly believe we are going to hyperinflate and you also believe that global wages will be under pressure, then the typical commodity has to do the lion's share of the inflationary work. Right? As seen in the chart, the typical exported commodity is very cheap compared to exported gold.

On the one hand, I see nothing in this chart to suggest that gold's bull run is over. On the other hand, I believe that when this exponential trend does end it is going to fail spectacularly. That trend line in red is increasing at a fairly consistent 15.5% annual pace and has been doing so for 11 years. Self-fulfilling prophecy? How is this any different from the "sure thing" Nasdaq bubble and the "sure thing" housing bubble?

What can I say? I am a gold heretic. Gold treated me very well from 2004 to 2006. I've since lost the faith. Gold does not interest me at anywhere near these prices.

I would also point out that these opinions are not based on what the dollar does or does not do. I'm simply comparing gold to every other commodity.

I stress that these are just opinions. This is not investment advice. I can only price gold for myself. I wear no jewelry. Jewelry clearly has less value to me than it has to others. In general, I don't like to be dependent upon what others think my investments are worth. When it comes to gold, that's about the only way I can value it though.

If I was the last person on earth, then gold would have very little value to me. That's not true of other commodities. I can certainly tell you what a glass of water would be worth to me if I had just crossed a desert. The word priceless might even come to mind, depending on the circumstances. I can also tell you what a gallon of gasoline is personally worth to me right this very minute. I would pay more than it currently costs. A gallon can get me to Costco and back. It's about 10 miles from my house. I'd really not want to do that on foot!

Source Data:
St. Louis Fed: Custom Chart


Who Struck John said...

I'd be very curious what that chart would look like if you extended it back to 1971.

Mr Slippery said...

In general, I don't like to be dependent upon what others think my investments are worth.

Then, you don't like any investments because that's how they all work. (I don't consider food and water as investments).

That's also how the US dollar works and all currencies. When others start to think they aren't worth anything, they become worthless. That is the definition of hyperinflation. If you are relying on a currency to maintain purchasing power, you are dependent on other people to think the currency is worth something in the future.

With that said, the gold chart doesn't scream buy like it did in 2000. It does have a long history of protecting against hyperinflation, and against one time currency devaluations like we had in 1933. Conditions now are very much as they were then with a huge debt residue left over from a financial bubble.

I continue to tithe to the gold church until the debt residue is resolved, via some new international monetary system, massive defaults, or massive inflation.

BTW, I was late to the gold party in early 2008. As the chart shows, I've done OK so far. I also sold a large percentage last year, so my religion is conditional.

Mr Slippery said...

Bonus thought: Have you looked at the TIPS vs commodities chart for the last 5 years. It looks a lot like the gold chart.

There is a new 10-year TIPS auction this week (7/19) for anyone who wants to lock in real losses for the next 10 years.

This is a gigantic red flag for the status quo. The financial system and its relationship to the real economy is so broken that people willingly put billions into losing investments every chance they get. This suggests that nearly all investments are losing investments. Smart people are just trying to find the least losing investment.

Stagflationary Mark said...

Who Struck John,

I'd be very curious what that chart would look like if you extended it back to 1971.

Here's a post I did back in January of 2011. You can see what it looks like going back to 1913.

January 20, 2011
Gold vs. All Commodities (PPI)

Stagflationary Mark said...

Mr Slippery,

In general, I don't like to be dependent upon what others think my investments are worth.

Then, you don't like any investments because that's how they all work.

That's not at all how I see it.

1. I buy TIPS. I hold to maturity. I don't require any input from other investors. In fact, I pray that real rates rise so that I can reinvest the proceeds at higher rates when my bonds mature.

2. When I owned stocks I knew what they were worth to me based on their dividend streams and my estimates of future dividend streams. That doesn't mean my estimates are correct. All it means is that I am not dependent upon the opinions of others. Had I believed in the resilience of the US economy then I could have gone to the grave with the stocks I owned and simply lived off of the dividend streams. That's not how it worked out of course. I became a permabear in 2004 and dumped them all. My estimates changed.

(I don't consider food and water as investments).

Why not? If I was to buy stocks again, I would definitely consider investing in food and water production.

Bonus thought: Have you looked at the TIPS vs commodities chart for the last 5 years. It looks a lot like the gold chart.

The difference, in theory, is that TIPS investors who hold to maturity never need to find a greater fool. I can estimate what TIPS are worth to me and do not need to concern myself with what others think they are worth.

I would also point out that although TIPS tend to move in the same direction as gold, gold has vastly outperformed TIPS.

For example, those who bought the 30-year TIPS in April 1999 got a 3.899% rate. Over the course of 30-years, that's more than likely a doubling of real purchasing power (once taxation is factored in and assuming we don't hyperinflate). Gold investors have done much better than that and only 13 years have elapsed.

In the end, TIPS and gold investors are both trying to maintain some purchasing power. That's definitely a similarity.

I realize that making money off of TIPS will be extremely difficult from here. All it takes is basic math to see that. There are many TIPS investors who might not think that way. I see it all the time on the Yahoo's TIP message board. Good luck to them.

Do gold investors realize that making money off gold may be extremely difficult from here too? I have my doubts. Or is 15.5% growth (as seen in this post's chart) being extrapolated into the distant future just because that's what the rear view mirror shows?

That's the risk that I see. Just something to think about.

TJandTheBear said...

Hi Mark,

TIPS held to maturity aren't risk free. They're payable in dollars, and the dollar itself is at risk. Who's to say the Treasury doesn't one day issue a "new" dollar and declare it worth 2.5x the "old" dollar? 1934 redux.

Stagflationary Mark said...


TIPS held to maturity aren't risk free.

I have never claimed that TIPS are risk free. I have said this more times than I can count though.

There is no safe store of value.

Stagflationary Mark said...

I have also said that TIPS will become nearly worthless if we hyperinflate (especially TIPS held outside a tax deferred shelter such as an IRA). It is one of many risks I take.

The taxes on the inflationary gains each year would be enormous.

That said, I can point out similar risks for gold.

Who is to say politicians won't slap a sales tax on gold bullion sales someday? It's already taxed at the unfavorable "collectible" rate of 28%. That certainly hurt when I sold in 2006.

February 7, 2010
Is Washington's tax exemption on bullion a gold mine?

Gov. Chris Gregoire repeatedly has singled out the bullion tax break since she ran for her first term in 2004 as an example of the sort of preferential treatment that ought to end.

I live in Washington State. Needless to say, she made me nervous as a gold coin owner.

Picture it. I bought them in 2004. That same year I have to read about her thoughts on slapping on a sales tax. Sigh.

Anonymous said...

Taxes are for little people and big mouths. (Paging Mitt Romney.)

Stagflationary Mark said...


Taxes are kind of like a fishing lure? Makes sense.

Tax a man's fish and you can feed yourself for a day.