Gold & Business Cycle Relationships

72
Sun, Dec 22, 2013 - 12:42pm

Here is a simplified graphic representation of The Business Cycle:

We can see how bonds do well during deflation, making their highs in the business cycle low. Stocks do well after the recession low passes, and commodities do best as inflation is peaking.

There is an overlap within each asset class of course. The stocks phase begins with bond-substitute defensive type stocks, which pay a dividend, highly valued during recessions. But the best performance soon rotates over to cyclical stocks, and then to growth stocks, and finally into high flyers, which tends to include some fresh paper, a surge of IPOs and then into junk as the market takes it’s percentage of loose money before it goes down.

Likewise, bonds are more or less risky depending upon the type of bond, and corporate bonds do best at a different phase of the bond bull market from eg sovereign bonds which are reputedly safer, but pay a lower rate of return.

So where is gold in all this?

I prefer to regard gold as occupying the place between “late” stocks and “early” commodities. In other words, a leading commodity. That reflects gold’s perceived function as an inflation hedge.

If only it was all so simple! But it isn’t!

For example, gold can act as “a fear indicator” rising to highs during times of conflict. At those times gold becomes regarded as the safest kind of money, and it takes over from bonds as the receptacle of risk avoiding capital flows.

So gold can move opposite to bonds and the same direction as late stocks ... a good amount of the time. But the rest of the time it can move in a different way, to reflect the cycles of war and disruption which sweep mankind. Oil tends to rise in those times too, so at those phases gold would correlate with the price of oil more than usual. Therefore we can expect a correlation to hold at times, and break at other times, returning to "normal mode" again sometime later.

Let’s look at the same asset classes, but in real life situations.

First the rotation from bonds to stocks :

Notice the times, marked when a top of bonds preceded a following top of stocks several months later. In fact, at these times when the stock market finally made it’s high, bonds had fallen so much that their first bear market low was already visible. This seems to confirm a rotation of capital from bonds into stocks, while also admitting that it is a minority of all the highs shown which demonstrate what is happening. So bonds have about 3 highs, or which only one of the three is an interesting high for the purposes of this discussion.

Case “E” in the chart above remains to be seen how it will work out.

How about rotation from stocks into gold?

During the 1970s the S&P (red) bottomed before gold. And at the 1987 crash it topped before gold. The 1982 low in both SPX and gold was at the same time. Other turns do not reveal anything.

How about later?

From the 90s to the 00s we see a different picture. In 1995 stocks (SPX in red) began to rise fast. This upturn decoupled from gold, which after the expected delay turned down, instead of up. In 2001 stocks topped and subsequently broke down, and a period later gold made it 2nd low, continuing the inverse correlation, but retaining the lead-lag relationship between the two.

In 2002 they recoupled, and both rise. In 2007 the SPX topped and turned down. Several months after the S&P gold made it’s high, and broke down into a decline.

And more recently – with a change from monthly to weekly timeframe in the timescale this is what we see:

The S&P made high in March 2011, continuing it’s role as “leader”, and gold went on to make following highs in August and a September 2011 high before breaking down. The gold lows in mid 2012, and the high in late 2012 were all preceded by the SPX.

But at end of 2012 the correlation reversed again, and the SPX moved up, with gold sinking. This has happened before.

The question arises as to causation and origin of these reversals in correlation between US stocks and gold measured in US dollars.

How about comparing gold to bonds?

Before getting tied up in that, it might be a good idea to first compare gold to bonds and see what is to be seen. I’ll skip to the last one and get to the point:

And it really appears that gold (green) is, in recent years, leading the TBond (blue) by about a year. This is interesting.

To sum up: a significant portion of the time, bonds lead stocks, stocks lead gold, gold leads bonds.

Occasionally the correlation between eg stocks and gold reverses direction, but the lead-lag relationship to stocks still seems to persist, though inverted. Not every turn is a significant turn for these purposes.

Right now, gold is leading the TBond downwards, and running about a year ahead of it. The TBond which leads stocks is going down (monthly basis) but stocks have gone in the opposite direction.

The implication might be that doing what it takes to support stocks is at the same time hurting the TBond.

That’s an interesting thought and it might be giving headaches to the-people-who-like-to-consider-themselves-in-charge. How far things can be stretched is always a tough question. But I think at CB level there might be a wakening acceptance, that they already know the answer, and every time they have new bonds to sell a reminder is served by the bond market. Playtime is coming to an end could be the message.

A last observation: while the anti-correlation is running, gold and stocks will probably retain their lead-lag relationship, inversely. We see to have gotten caught in a time warp operated by Central Bankers and it looks like we could be in the year 2000.

If the correlation was to go normal-wise for the coming year or two we could get something like this:

I have not gone into the geopolitical situations which pertained during the reverse correlation times, and that would be worth following up at a later stage. The conditions for reversal and return to normal of the correlations are also not investigated here, but worthy of looking into.

Still the clues dropped by the market are few, and always difficult to decipher, and this relationship appears to be one of them.

.

Argentus Maximus

The author posts daily commentary on the gold and silver markets in the TFMR forum: The Setup For The Big Trade. More information about the author & his work can be found here: RhythmNPrice.

About the Author

  72 Comments

Dagney Taggart
Dec 22, 2013 - 2:16pm

Good

I like to see another 2000. The spectacle of loudmouth sheep thinking they're all that getting slaughtered was memorable.

PS. @Fix Good point. When there is extreme intervention, don't cycles become unpredictable? Regarding illusions: I can't remember the last time I listened to talk radio while traveling south where some comedian didn't say "recovery". It can't be repeated for 4 years straight while expecting people to believe it just because they say so. At some point people need to see it firsthand. They obviously don't otherwise it wouldn't need to be repeated.

Dagney Taggart
Dec 22, 2013 - 2:26pm

@silver2013

Along the lines of what I just said to Fix....

I've heard in 2008 recovery.
2009 recovery.
2010 recovery.
2011 recovery.
2012 recovery.
2013 recovery.
2014 will be the recovery..
..just saying some facts too....so what's going to happen in 2015? Let me guess...recovery.

I sincerely have to ask: are you really stupid enough to believe that extreme market intervention ends well?

The only people appearing to prosper now are those who have access to free CB cash and can carry a large balance sheet. These are also the people who have no value-adding skills. None. How does this end well again?

Dagney Taggart
Dec 22, 2013 - 2:34pm

@argentus

Palladium in 2011. We're pretty happy with that stack.

Dec 22, 2013 - 2:53pm

About repeated forecasts of

About repeated forecasts of recovery, of the coming end, and so on ...

Ecclesiastes 1:9 - "What has been will be again, what has been done will be done again; there is nothing new under the sun"

Don't knock the power of cycles. When your life cycle comes to an end just try to break that one.

More superficially, try to break the daylight cycle by going to work at random times and see what clients say. Try to do your taxes at a time of your own random choice and see how that works out for you. These things are everywhere, constraining free choice to narrow possible and practical options for choice. Even for a Fed governor they constrain.

Cycles is another word for consequences.

I take it you have no problem acknowledging the inevitability of consequences for what has been and will be done?

silver2013
Dec 22, 2013 - 4:21pm

facts:

In 2008 my 401k was down 48%. Now, Dec/21/2013 my 401k is up over 100%. So yes in my book this is a recovery for me. My only concern in my 5% in metal is down 30%. If gold gets below 800$ I'll bring my 5% to 10% just recoup some of my losses. I dont know how this is going to end but I have recovered all of my 401k plus some. And the game ( stock market) only works with rules and regulations and guess what . THE FEDS AND BIG BANKS make those rules and regulation. So if you want to play the game you CAN NOT FIGHT THE FEDS AND BIG BANKS.

Dec 22, 2013 - 5:03pm

@Dagney Palladium. I began to

@Dagney

Palladium. I began to watch it too late last year to do anything but learn about wide spreads, for physical, and holding charges at Goldmoney which being a percentage of capital (like bullionvault) rise as your metal appreciates, assuming being on the right side.

Which left miners, rolling a futures position, shorting options, and a palladium ETF. ETF seems to be the default choice. I'm curious as to which Pa vehicle you settled on .

As far as the analysis went, I thought that a choppy rise into April might be followed by a fall in late April-May to give a good entry setup to get a new position in palladium. It's another of those "pay attention if it happens" entries in my diary!

fraxinus
Dec 22, 2013 - 5:04pm

@ silver2013: If the bullion banks were still in control...

Why are they begging the gold miners for supply? You'd almost think the cupboard is bare, and that new and better buyers have frozen them out of the market.

murphy
Dec 22, 2013 - 5:22pm

@TomM

THE REAL JOB OF THE FEDERAL RESERVE

Federal Reserve, Jim Grant, Richard Sylla, Wall Street

“New thing – it is in the business of talking up the stock market…The Fed is manipulating prices, especially on Wall Street. The Fed has presided over the decay of finance.”

Jim Grant

“The Fed seems to have, I think almost deliberately, is trying to push the stock market up. I’ve watched this stuff for 40, 50 years now and this is the first time in my memory when it seemed to be official U.S. government policy that the stock market goes up. And the Fed likes this because it thinks that when the stock market goes up, people who own stocks feel richer, they’ll go out and spend more money, and the unemployment rate will come down.”

Professor Richard Sylla

https://www.theburningplatform.com/2013/12/22/the-real-job-of-the-federa...

James Grant & Richard Sylla - The Great Fed Debate!
bullion only
Dec 22, 2013 - 5:37pm

The end game is happening as we speak

The end game is happening as we speak. Individuals have experienced the end game. Those in the 1% are set for life as well as for generations to come in a way no one could have imagined. Those fortunate few that went from millions to billions have experienced their pwn form of end game.

Those on the other extreme have lost jobs, homes, family beyond their wildest imagination. They have seen their savings erode, pensions cut, careers ended, hopes dashed, plunged into poverty and experienced their own personal end game.

Companies are bankrupt, jobs have been outsourced, cities have been gutted, prisons are overcrowded, schools are underperforming and people are disillusioned.

So yes Virginia there is an end game coming soon to a family near you.

What are we to do?

Keep stacking if you can otherwise you will be on the wrong side of the end game.

Happy holodays,

RT

meegoreng1
Dec 22, 2013 - 5:59pm

100 YEARS OF DOMINATION BY GUESS WHO?

In honor of 100 years anniversary of the Federal Reserve, I present to you the real culprits:

Who Controls the Economy?

Ben S. Bernanke(Ashkenazi Jew) – Chairman, Board of Governors, Federal Reserve System

Janet L. Yellen(Ashkenazi Jew) – Vice Chairman, Board of Governors, Federal Reserve System

Gary G. Gensler(Ashkenazi Jew) – Chairman, Commodity Futures Trading Commission (CFTC)

Read more and be amazed...

https://thezog.wordpress.com/who-controls-the-economy/

Subscribe or login to read all comments.

Contribute

Donate Shop

Get Your Subscriber Benefits

Private iTunes feed for all TF Metals Report podcasts, and access to Vault member forum discussions!

Key Economic Events Week of 9/16

9/17 9:15 ET Cap Ute & Ind Prod
9/18 8:30 ET Housing Starts & Bldg Perm.
9/18 2:00 ET Fedlines
9/18 2:30 ET CGP presser
9/19 8:30 ET Philly Fed
9/19 10:00 ET Existing Home Sales

Key Economic Events Week of 9/9

9/10 10:00 ET Job openings
9/11 8:30 ET PPI
9/11 10:00 ET Wholesale Inv.
9/12 8:30 ET CPI
9/13 8:30 ET Retail Sales
9/13 10:00 ET Consumer Sentiment
9/13 10:00 ET Business Inv.

Key Economic Events Week of 9/3

9/3 9:45 ET Markit Manu PMI
9/3 10:00 ET ISM Manu PMI
9/3 10:00 ET Construction Spending
9/4 8:30 ET Foreign Trade Deficit
9/5 9:45 ET Markit Svc PMI
9/5 10:00 ET ISM Svc PMI
9/5 10:00 ET Factory Orders
9/6 8:30 ET BLSBS

Key Economic Events Week of 8/26

8/26 8:30 ET Durable Goods
8/27 9:00 ET Case-Shiller Home Price Idx
8/27 10:00 ET Consumer Confidence
8/29 8:30 ET Q2 GDP 2nd guess
8/29 8:30 ET Advance Trade in Goods
8/30 8:30 ET Pers. Inc. and Cons. Spend.
8/30 8:30 ET Core Inflation
8/30 9:45 ET Chicago PMI

Key Economic Events Week of 8/19

8/21 10:00 ET Existing home sales
8/21 2:00 ET July FOMC minutes
8/22 9:45 ET Markit Manu and Svc PMIs
8/22 Jackson Holedown begins
8/23 10:00 ET Chief Goon Powell speaks

Key Economic Events Week of 8/12

8/13 8:30 ET Consumer Price Index
8/14 8:30 ET Retail Sales
8/14 8:30 ET Productivity & Labor Costs
8/14 8:30 ET Philly Fed
8/14 9:15 ET Ind Prod and Cap Ute
8/14 10:00 ET Business Inventories
8/15 8:30 ET Housing Starts & Bldg Permits

Key Economic Events Week of 8/5

8/5 9:45 ET Markit services PMI
8/5 10:00 ET ISM services PMI
8/6 10:00 ET Job Openings
8/8 10:00 ET Wholesale Inventories
8/9 8:30 ET Producer Price Index

Key Economic Events Week of 7/29

7/30 8:30 ET Personal Inc/Spending & Core Inflation
7/30 10:00 ET Consumer Confidence
7/31 8:15 ET ADP employment
7/31 2:00 pm ET FOMC Fedlines
7/31 2:30 pm ET CGP presser
8/1 9:45 ET Markit Manu PMI
8/1 10:00 ET ISM Manu PMI
8/2 8:30 ET BLSBS
8/2 10:00 ET Factory Orders

Key Economic Events Week of 7/22

7/23 10:00 ET Existing home sales
7/23 10:00 ET Richmond Fed Manu Idx
7/24 9:45 ET flash Markit PMIs
7/25 8:00 ET Count Draghi/ECB policy meeting
7/25 8:30 ET Durable Goods
7/25 8:30 ET Wholesale Inventories
7/26 8:30 ET Q2 GDP first guess

Key Economic Events Week of 7/15

7/15 8:30 ET Empire State Fed Index
7/16 8:30 ET Retail Sales and Import Price Index
7/16 9:15 ET Cap Ute and Ind Prod
7/16 10:00 ET Business Inventories
7/17 8:30 ET Housing Starts and Building Permits
7/18 8:30 ET Philly Fed
7/19 10:00 ET Consumer Sentiment

Recent Comments

by Outback, 50 min 33 sec ago
by Blackwatersailor, 1 hour 20 min ago
by Montross515, 2 hours 9 min ago
by AgstAger, 2 hours 49 min ago

Forum Discussion