Two clues:
1) It is a chart of one asset or asset class relative to another
2) The start date is not random
Answer: Global equities total return, versus gold. The start date is the month that Nixon took US off the gold peg, August 1971. Interesting that at the market bottom in March, gold had actually matched the total return of equities over the entire period. Gold provides no income and has no real utility value. It is purely a store of value.
I still cannot figure out what this is telling me, and in particular why gold should suddenly start performing so well only recently. If it were inflation/monetary debasement fears then bond yields should have gone up by now, but they have not. If it were concerns over general financial stability then equities should have performed a lot worse. Yet the most recent rally has seen both gold and equities go up. I cannot explain gold; it remains a mystery to me.
3 comments:
whilst i cant explain the graph either, perhaps it is like trying to find a correlation between road deaths and space deaths, i do feel we can find an explaination as to why gold is doing so well recently.
first off, we need to remember that gold can move very quickly and this may just be me looking for a reason to fit the current level.
but, consider this. there seems to be much talk about countries moving away from the US$. the IMF has recently sold its first non-US bonds; there was that (strongly denied) talk between various nations on pricing oil in a currency other than US$.
however, for those that do choose to move away from the US$, where do they put their money? not obvious. not the Yen, not the euro, not much left.
hence, for me, gold seems to be acting like a temporary reserve currency. hence, under this scenario, both gold and equities can rise.
Good point about the reserve currency. It is interesting that western central banks already have a much greater percentage of their reserves in gold than do the Asian central banks, so if the latter were to diversify it could drive the price up a lot further.
It has always been a bit of a mystery to me why central banks don't hold more Euros. An alien observer would surely conclude that the Euro makes for a much more sensible reserve currency - independent central bank, inflation focus etc etc. I guess in the market for the reserve currency, there can only be one winner.
i run the risk of taking an obsesive interest in gold, but . . . . .
India buying 200 metric tonnes of gold for $6.7bn from the IMF and therefore becoming the eighth largest holder of gold in the world is i think further indication that we are seeing a diversification away from the US$. The purchase represented 8% of annual output. India now holds gold equal to 6% of its currency against western countries at 8%, and China at only 1.5%.
perhaps worth noting that Berkshire Hathaway's purchase of Burlington Northern is perhaps a trade out of US$ into a commodity transportation company.
and so i suspect the reason gold is performing so well is that we now have a strong diversification trade on the table.
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