I published a blog post in late-June titled “Gold has peaked for the year“. In this post I argued that
relative to other commodities (as represented by the Goldman Sachs Spot
Commodity Index – GNX) gold’s peak for 2016 most likely happened in February.
As evidenced by the following chart, I was correct.
The reason for this follow-up post is not to give myself a public ‘pat on
the back’. I’ve made my share of mistakes in the past and I will make
mistakes in the future. The sole reason for this post is the vitriolic
response that my earlier article received.
My earlier article should not have been controversial. After all, the
February-2016 peak for the gold/GNX ratio wasn’t just any old high, it was an
all-time high. In other words, at that time gold was more expensive than it
had ever been relative to commodities in general. Furthermore, it is typical
for gold to turn upward ahead of the commodity indices and to subsequently
relinquish its leadership.
With gold having outperformed to the point where it was at its highest
price ever relative to the prices of other commodities and with other
commodities likely to recover, saying that gold had probably peaked for the
year in commodity terms should have been viewed as a statement of the
bleeding obvious. It would have taken a financial crisis of at least 2008
proportions during the second half of 2016, that is, it would have taken an
extremely low-probability financial-market outcome, to propel the gold/GNX
ratio to new highs during the second half of the year. That some readers took
my “Gold has peaked” article as an affront was therefore remarkable.
Remarkable, but not really surprising given that in the minds of some gold
devotees the gold price is always too low. It doesn’t matter how high the
price is or what’s happening in the world, the price is always about to
skyrocket. The only obstacle in the way is a cabal of evil market
manipulators that will soon be overwhelmed by the forces of good. And in any
case, a financial crisis of at least 2008 proportions is always about to
happen.
Gold’s poor performance during the second half of 2016 was consistent with
what I refer to as the true fundamentals*. This means that it wasn’t the
result of downward manipulation. That being said, the great thing about
believing that market trends have almost nothing to do with “fundamentals”
and almost everything to do with manipulation is that you never have to be
wrong. If any market goes against you it was due to the distortive effects of
manipulation rather than a fatal flaw in your analysis.
*The true fundamental drivers of the US$ gold price are, in no
particular order: US credit spreads, the US yield curve, the real US interest
rate, the relative strength of the US banking sector, the US dollar’s
exchange rate and the general trend in commodity prices.
