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Gold is Dead and Neitzsche had Nothing to do with it

Commodities / Gold & Silver 2009 Feb 05, 2009 - 10:53 AM GMT

By: Oxbury_Research


Best Financial Markets Analysis Article“Gold kind of scares me because very often the people involved with it seem to be slightly insane.”– James Montier, head of equity research, Societe Generale, London

Some say that it doesn't matter when you buy gold, that you should buy it regularly and always, and that it represents the only true store of value. Fair enough. When all is said and done, buying gold may be the only means of acquiring real wealth for the very long term. Especially today, when all major currencies are devaluing by hook or by crook – some voluntarily, others not so – it behooves an investor to shore up his gold holdings.

Yet at the same time, from a pure investment point of view, it's never a good idea to sink money into a depreciating asset. That's what the smart guys call “dead money.” And when it comes to gold, which neither pays a dividend nor offers interest, a decline in value against other asset classes is not something we want to bear, if given the choice.

That in mind, we come (again) to comment on the current price level of the yellow metal, and to suggest what is to be done for those who currently hold bullion and/or gold stocks, and those who are considering making an imminent purchase.

First the case for immediate purchase:

  1. Gold is a hedge against inflation (so they say), and we have massive inflation in the pipeline .
  2. Gold is a safe haven and will rise due to continued financial troubles globally.
  3. Gold is the only currency capable of replacing the fiat currency monstrosities now in use the world over.
  4. Bullion supply is declining.
  5. Investment demand for gold is underpinning a steady, unstoppable rise in price. The chart below clearly shows the increased role ETFs are playing on the demand side – irrespective of the price of the metal.

And now the case against:

  1. Weak fabrication demand. Gold jewellery accounts for about 60% of global gold sales. In times like these, though, it's hard to imagine buying the dear Mrs. another dear piece of jewellery.
  2. A strong dollar would take the wind out of gold's sales, and could drive it significantly lower.

It's to this latter point we now turn our attention.

Look here

You're looking at a chart of the U.S. Dollar Index for the last year. We've brought it to make a comparison with gold, but first a brief explanation.

Gold and the dollar have an inverse relationship; when one is rising, the other falls. It hasn't always been this way, but long enough to be relevant to those of us who care about timing our gold purchases. According to Bloomberg , gold and the dollar have had a

-0.7% correlation over the last five years. That's significant. Now look here:

This is gold over the same time frame. Note the correlated decline in price.

Research from the World Gold Council shows that the correlation between gold and the dollar is stronger when the latter is falling. At such times “investors tend to diversify away from dollar-linked assets, boosting the negative relationship between the two.”

Fine. But that leads us to the $64,000 question: what to make of the purple, boxed areas on the right side of both charts.

On the one hand, we have a dollar that pulled back significantly after its rise into December, and which is now moving up to test its previous highs. And on the other, we have gold's uninterrupted climb of $200 from its late November lows around $720. How do we account for this? What happened to the inverse relationship? Should we expect things to look different? Or is this just one of those times (30%) when the two don't correlate?

Or could it be that the World Gold Council's research explains it. Could it be that the dollar's fall led to a “heightened” inverse correlative with gold, a sort of extraordinary stimulo-genesis of the AU tissue in goldbugs the world over that led to frenzied buying and will yet prove their undoing when they wake up to the fact that the dollar may yet spike to new highs!?

And what will happen to their gold rally then, friends?

The NEGATIVE CORRELATIVE (ha, ha, ha – I'm a bloody genius!) has been delayed. But it will not be denied!

More butter! NOW!

Matt McAbby
Analyst, Oxbury Research

After graduating from Harvard University in 1989, Matt worked as a Financial Advisor at Wood Gundy Private Client Investments (now CIBC World Markets).  After several successful years, he moved over to the analysis side of the business and has written extensively for some of corporate Canada's largest financial institutions.

Oxbury Research originally formed as an underground investment club, Oxbury Publishing is comprised of a wide variety of Wall Street professionals - from equity analysts to futures floor traders – all independent thinkers and all capital market veterans.

© 2009 Copyright Oxbury Research - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Oxbury Research Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


05 Feb 09, 14:44
Gold: Everyone has an OPINION

You stated this:

And now the case against:

Weak fabrication demand. Gold jewellery accounts for about 60% of global gold sales. In times like these, though, it's hard to imagine buying the dear Mrs. another dear piece of jewellery.

A strong dollar would take the wind out of gold's sales, and could drive it significantly lower.


To say that the VALUE of GOLD is tied to its JEWELLERY demand or Dental Filings is like comparing HUMANS to being sold as SLAVES. Many analysts who believe in the KEYNES THEORY OF FIAT MONEY would also value gold and silver as a mere COMMODITY. This is no surprise as the KEYNES THEORY of FIAT MONEY has been INDOCTRINATED in the WHOLE COLLEGE SYSTEM as well as PUBLIC and PRIVATE SECTOR.

FIAT MONEY was a nice EXPERIMENT. Gold has been around for thousands of years. TWO-BIT ANALYSTS and ECONOMISTS who want to DIG UP KEYNES and keep his pathetic THEORY of FIAT MONEY ALIVE....are the very ones who are saying GOLD IS DEAD.

06 Feb 09, 09:49
Nietzsche ist nicht tod

Matt I would be happy to buy your last gold coins from you and you enjoy my (fiat) pounds!

06 Feb 09, 13:17
Gold half-baked argument!

If it is possible to have strength in the dollar while it has been de-valued through the Federal Reserve and its printing presses, then we are truly living in a fools paradise. Fiat currency or I.O.U's are only as good as those who have goods to back it. The United States manufactures very little. This country put its entire ecnomy in one global basket. Tru macroeconomics is to diversify assets and liabilites. If we make nothing and we export our debt (like Mortgage Backed Securities)to create ne wealth, then the mighty truly have fallen.

So where in your infinite wisdom is the back-up plan since the current vehicles of wealth have failed.

The emporor is naked. They are stealing from the global taxpayer to continue the illusion of wealth. Take heed, the banksters have been exposed. the stock market only works when everyone believes it should work. Its called collusion. The governments of the G-20 have raised us to believe its ok to share in the crimes they have been committing. Live free or die!

Matt W
07 Feb 09, 19:23
Backwards Gold Analysis

Ohh this article made me laugh.

I think you got your analysis backwards. You need to take into account the trillions of fiat U.S. dollars being printed.

Thanks but i'll keep my Gold.

10 Feb 09, 17:53
Manipulation is key

The recent fall in gold (against the dollar), not replicated in other currencies, began in run up to election. The rout changed course almost on election day. The elite surely are capable of a few months gold manipulation for their favorite Hollywood movie, aka, democracy, why has everybody missed this? Is it because market fundamentalists refuse to recognize that we don't have free markets, that there is a group of insiders who are capable of manipulating markets to a significant extent?

11 Feb 09, 06:00

what is neidsche? comes from "neid" ???

12 Feb 09, 08:47
Societe Generale

“Gold kind of scares me because very often the people involved with it seem to be slightly insane.”– James Montier, head of equity research, Societe Generale, London

Societe Generale SA 1-Year return: -62%

Gold 1-Year return: 0%

Brilliant strategists at SG.

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