Category Archives: BGMI

The Hidden Story of Gold

Gold is currently languishing in a trading range between $1,366 to $1,049. This trading range is thought by many to be a pause before the eventual increase above the previous high at $1,895.  After all, the price of gold had managed to decline from $1,895 to the low of $1,049.40, a drop of –44.62%.  Part of the thinking of a new high in gold is predicated on the idea that we are entering a phase of rising inflation after years of decreasing inflation from the 1980 peak.

Introduction

If the thinking is that gold is on the cusp of new highs, there is one question that we need to answer.  The question is, “What happens with the price of gold in the early stages of an inflation cycle?”  What is amazing about this question is that in the early stages of the last inflation cycle from 1939 to 1942, gold was fixed at $35 until 1971.

Never in the history of the United States have investors seen the reaction of the price of gold to the early stages of rising interest rates.  In this posting, we’ll attempt to show a reasonable benchmark for gauging what would happen if there weren’t restriction on the  price of gold.

How are we going to explore the price of gold in a period when there was not a free floating price for the metal?  By examining what the price of silver has done in the period when interest rates rise in response to increasing inflation.

Silver is the perfect means to convey the message of what would have happened to the price of gold if it were allowed to navigate the whims of Mr. Market.  While silver is more volatile than gold and prone to extremes it still tells the story of gold when gold did not have a voice.

Interest Rate and Inflation Cycle

We start with the price of silver from the peak in 1925 because, according to Dewey and Dakin's in their 1947 book Cycles: The Science of Prediction, the last peak in wholesale prices, which generally corresponds to interest rates.  If you have a beat on interest rates, you can get a better sense of where we are and where we might be going as it relates to precious metals.

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Remember, you don’t have to be a fan of cycle theory to appreciate the quality of analysis that reflects what has already happened from a book written in 1947.  Calling the peak in 1979 and the trough at 2006, while not exact, is the best way to learn from the past.  Looking at the 3-month Treasury, we can see the fulfillment of an entire cycle in rates from 1940 to 2009.

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Just think, there is no official data that extends from prior to 1934 to the present.  Without this important continuous information, it is difficult to find data that we can compare like-for-like stages in the cycle.  However, we do have data from the price of silver in the previous cycle top to the low that corresponds to the low in interest rates and silver.  This will be our introduction to the secret history of gold.

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Wanted: Real Gold Experts

Experts on the topic of gold are a dime a dozen.  However, few, if any, are actually experts at all.  With the ability to be quoted day in and day out, there is little or no accountability when it comes to accuracy of claims.  Of course the “expert” will not provide the gaping (and ongoing) lapses in their analysis and the published website touting them won’t bother to define what makes them an expert.  All that seems to matter when qualifying as an expert on gold or gold stocks is that they are loud, speak often, never fail in their love of gold, make exaggerated claims, and go to the many headlining confabs arranged by the industry.

So what is a “real gold expert?”  A real gold expert is someone who appreciates the good and bad of gold whiled able and willing to make the call, buy OR sell (no hold recommendations allowed).  A gold expert that we have been working hard to get more information on is Alden Rice Wells.  We know that Wells was bullish on gold stocks in the 1960’s in his Monetary Reports newsletter (PO Box 401, Exeter, NH, 03822) and was a contributor in the Inflation $urvival Letter (410 First Street S.E., Washington D.C., 2003) in the mid-1970’s.

What stands out about Alden Rice Wells?  After being a big proponent of gold and gold stocks through the 1960’s and early 1970’s, Wells warned that gold and gold stocks were going to crash in May 1974.  The following excerpt is from Richard Russell’s Dow Theory Letters dated May 31, 1974:

"Several subscribers have asked us to comment on the recent recommendations of Alden Rice Wells, one of the original gold bugs, that silver and gold holdings be liquidated in anticipation of a crash, or depression (Richard Russell. Dow Theory Letters. May 31, 1974. Letter 599. page 6.).”

This is the performance of the Barron’s Gold Mining Index leading up to and after Wells’ recommendation to sell gold.

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In the same period of time that Wells made the call for a crash in precious metals, gold declined –33% and silver declined –25%.  This is what we would consider an expert opinion on the topic of precious metals.  

What do investors need in a precious metal expert? A bullish perspective when it is time to be bullish and a bearish perspective when it is time to be bearish. Where are the experts today?

Gold Stock Indicator: September 19, 2014

Gold as represented by the SPDR Gold shares (GLD) and gold stocks as represented by the Philadelphia Gold and Silver Stock Index (XAU) have declined –1.48% and –5.42%, respectively.

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Gold and gold stocks are getting decimated in the latest decline.  Our Gold Stock Indicator (GSI) is getting very interesting.  Below are the GSI for the Philadelphia Gold and Silver Index  (XAU) compared to the Barron’s Gold Mining Index (BGMI).