Wednesday, 16 May 2012

gold in the market context

I'm no economist or trader, but I was looking at some graphs today and wondering.

Looking at gold trends for available and worthwhile data I see some interesting historical matches

the first blue rectangle is where the USA phased out its relationship with gold.

  • By 1971, the money supply had increased by 10%
  • inflation-wary West Germany was the first member country to unilaterally leave the Bretton Woods system [the agreement to allow the USA to be the central money for world trade], unwilling to devalue the Deutsche Mark in order to prop up the dollar.
  • Switzerland  redeemed $50 million of paper for gold in July.
  • France, repeatedly made aggressive demands, and acquired $191 million in gold, further depleting the gold reserves of the U.S.
  • By March 1976, the world's major currencies were floating
So this led to people purchasing gold (and increasing demand on a highly limited resource) pushing prices up.

The next area which is interesting to observe is the period between 1990 and 1999 when gold started to fall over a sustained period with no spikes. Interestingly this corresponds to the period of the dot com (.com) revolution where people were convinced you could make money from investing in software and communications. Its interesting to note that Microsoft did not register their own domain till 1991

By 2000 this had settled down and people were returning to examine other avenues of investment / money safe haven.

By 2004 it had become reasonably clear that the USA was in financial and military trouble and was not actually winning any wars on terror or gaining traction against those who attacked them on Sept 11 2001

Looking at the falls of the last 30 days in broader context it seems that the rise up to $1800 was just a spike. Its interesting to note that all spikes have eventually been met by the line of average growth in time.

The olde rule of thumb of "buy on the lows" would seem to be the best strategy still.

So with gold "falling" now in the short term the question in my mind is where is the bottom at the moment to pick the best time for buying before the next raise?


Some other quick thoughts came to mind: first if you plot the changes in a LOG curve you get a much more stable looking thing from the early 70's till now

Now if we add to that the DOW in the same manner

It would seem that things have been pretty quiet over at the DOW house since about 2000. Strange that gold has 'gone up' a bit from about the time that the DOW has gone quiet.


Charles Maclauchlan said...

I tend to be very wary of these temporary drops in the price of gold. Within a small range all prices might be temporarily manipulated.

Certain commodities (usually gold) are a benchmark against which to judge currencies. With much of the industrial world infatuated with the notion that governments can spend their way out of debt currencies are in a precarious position. Europe it seems loves to spend German money and the US China's money. Elections seem to show that Europe has no intention to follow fiscal conservatism and the upcoming election in US will determine if we will follow suit or finally do the right thing.

It doesn't have to be gold, but there has to be something that retains true value while the printing presses are running overtime.

obakesan said...

Charles, long term I reckon the fluctuations are just noise in the system.

I look at things which go up and down as being similar in operation to a pump. In this case the fluctuations are a way of pumping money from one section of the market to another.

I'm more the water tank model meself


Bullion Baron said...

There's an old saying about picking bottoms resulting in smelly fingers ;)

I don't care too much for buying at the absolute lowest point, I just gradually buy the dip as the price falls (although tend to increase the intensity of buying if the correction is more severe).

The bull market will correct any mistakes in timing while it continues.

obakesan said...

BB, good advice, but you know some people can't help themselves.

I'll go wash my hands now ;-)