This page has been archived and commenting is disabled.
Guest Post: Gold And Stocks Love Inflation, Right?
Submitted by Alexander Gloy of Lighthouse Investment Management
Gold and stocks love inflation, right?
In theory, stock prices react positively to inflation. You can
explain that with the balance sheet effect: while debt remains same in
nominal terms, assets gain in value (with the difference showing up in
the equity position via net profit).
Gold should also benefit from inflation as the supply of precious
metals is limited – hence they will go up in price if money supply
increases.
Taken together we should assume that gold and stocks are positively correlated (if one moves up, the other one does the same).
Let’s look at rolling correlations (40 and 80 days) between GLD (gold ETF) and SPY (1/10 S&P 500 Index ETF):
In the above chart you will see that correlation actually varies wildly (between -0.6 and +0.9).
A major change into positive territory ensued after Ben Bernanke
announced QE2 (Quantitative Easing round 2) in a speech on August 27,
2010. This was clearly positive for both stocks and gold, since the
economy was supposed to be stimulated by printing money.
The subsequent break-down in correlation into February 2011 could be
explained by the fact that, despite quantitative easing, inflation
remained somewhat contained in the United States.
Recent weakness in marco-economic indicators took a toll on stocks
while gold managed to reach new record highs. The reasoning could be
that the worse the economy gets, the more likely the Federal Reserve
Bank will unleash more quantitative easing.
As long as the stock market does not show signs of serious trouble
the Fed seems unlikely to act; the current “decoupling” (negative
correlation) is therefore expected to continue for the time being.
»
- 9800 reads
- Printer-friendly version
- Send to friend
- advertisements -
i'm guessing the 70s bout had a negative correlation as well.
Hong Kong Metals Exchange Opens Silver Contract Friday!
http://dont-tread-on.me/hong-kong-metals-exchange-opens-silver-contract-...
That will certainly make it more difficult to slam silver to keep it down.
On another note, China puts yet another piece of the puzzle in place to move to a gold & silver backed currency once the Western currencies crash. I haven't seen much written about it but I'm sure I'm not the only one to think it.
You are dead on..they are quietly buying gold and silver.....and any other commodity for that matter....all for the day when the Western world crashes...then they will come out of the shadows and lay out their plan of a new world reserve currency.....Russia, India, and the BRICs will be with them....probably the Arabs also..I think it will be metals based...not a new paper...
Ain't gonna happen that way...war will come first and China (if it's on the wrong side) will be decimated. Financially decimated. The west will hold up it's middle finger by declaring all debts to China dissolved. China doesn't have a global ability to fight a war. They have no deep water navy. No long range AF (besides missiles and that IS suicide). War is coming...in the ME...over the oil fields. We need it, they've got it...we're going to get it! China if it's smart will side with us. The ME is falling...we're getting as much as we can peacefully before we HAVE to strike...before the collapse. They'll stage something, another terror attack probably and pin it to Iran...and then the sparks will fly.
Forget about China taking over the world...TPTB are mostly white guys...remember that.
I love those Chinese with their gambling habits :)
LETS BRING SILVER WHERE SILVER NEVER WENT BEFORE! WARP 7 SCOTTY!
:)
They love bankrupt regimes even more. Somehow the shineys see thru the BS.
No thanks to Libtards, or Libtardarians.
I agree only the Republicans make it possible to get to God thru them.
Bow down to your goddess Wasserman-Schultz!
You are still an embarrassment to Fl.
obama is going to redistibute the wealth by raising gold once...
coming VERY soon
the chinese have already used up all their dollars buying physical resources...
Game is over shortly
Chinese have used up all their dollars? Hardly. Where do you get this stuff?
Fuck you progressive cunt rags. You and your leader have been exposed. Go right ahead and push the crisis button. The more crisis, the better.
Case 1:11-cv-00276-CMH -IDD Document 1 Filed 03/17/11
http://www.google.com/#sclient=psy&hl=en&source=hp&q=Case+1:11-cv-00276-CMH+&aq=f&aqi=&aql=&oq=&pbx=1&bav=on.2,or.r_gc.r_pw.&fp=fa26eb184f58bc00&biw=1920&bih=973
It will be funny to watch how fast and furiously your expelled from office. Kindly page the teleprompter for advice. They love to write jokes aimed at smoothing over deception.
Yeah, let's get rid of Obama now because he's not fucking the country over quick enough for douchebag Republicans like you.
What do you bring to the table? Deregulated banking and tax cuts for hedge fund managers?
Fuck off.
Sounds like your unemployment checks are about to expire. Would you mind pissing in this bottle to check your drug habits? If you refuse, we're going to cut off your food stamp entitlements with a (SNAP) of a finger.
yes i would mind. the two parties are like professional wrestling.
I think both the democrats and republicans deserve a bullet between the eyes. It these two fucktard parties that is destroying the U.S.
the blueprint was laid for this years ago if not a decade..........i'm not a obama fan but thats why u had the choice u had in 08 no oneone wanted to be on watch for this
Link is very interesting - SEIU 'manual' ... worth a look
GLD is not money...nor is the SPY but good try....
Re-elect Oweblama! Vote Ron Paul!
You people junk me for calling you Libtardarians?
Why?
Cuz ending the Fed cures all?
you are a bad ole puddy tat!
http://www.youtube.com/watch?v=Xx43vcV2aX0&feature=related
Your still stuck in the era of political party entities. In the near future, you'll have a WTF moment.
Listen to me very closely.. Ending the Fed is part of the spun propaganda plan. Many will cheer in delight, only to find out they were hoodwinked for the new sinister peasant tax collecting system.
------------>>>>>Basel III<<<<<----------------
Would be interesting to see oil on that chart, or maybe gasoline.
Default Here, Default There, Default...
Everywhere?
This is all we will hear this week and next until they "save" us again.
Treasury Secretary Geithner said this morning "there is no plausible way to run the government after Aug. 2 without the debt ceiling being raised".
THIS statement is an absolute admission of insolvency, default and bankruptcy.
Think about this for a moment, 2-3 years ago it was heresy to even suggest that the U.S. would EVER default, now it is mentioned on every news program every day. But no one REALLY believes it will happen, OR maybe they are just now starting to figure it out.
The equity markets are roiling, Gold and Silver are like locomotives in 1st gear mowing down any and all shorts while the FOREX markets can't figure their minds out as to which currency is the "worst". What is happening is that market participants are slowly figuring out that either way this goes (raising the limit or not) does not will not and CAN NOT solve the problems that exist.
In the fall of 2008 the problems were not "liquidity", it was a solvency problem.
THIS is exactly what the markets are just now smelling and figuring out.
THE SYSTEM is insolvent to the core AND not only is it the banking and financial systems, it is sovereign governments.
Let's take a look at what happens if the U.S. does not give themselves another credit card. It will be considered a "technical default" and as Mr. Geithner says "no plausible way to run the government".
THAT is not the problem, the real problem will be all of the "credit default swaps" (CDS) that get triggered.
I have no idea what the exact figures are but it in the "$ Trillions" is for sure. The Lehman default won't even look like a pimple on an elephant's ass in comparison.
These CDS are held worldwide and thus you will see default everywhere you look and you won't have to look under rocks to find them! The entire system will stop and who knows how long it will take to completely seize up. Then of course you must ask yourself how long it will take to get up and running again? Do you have "enough" on hand at your home to weather a one month storm? 2 or 3? 6 months?
Will this scenario happen? ... 99% sure that a "deal" will get done for the reasons above... we will get a "reflex rally" because "they saved the day again". It is during this rally that you must make sure you have everything you think you will need for the next 6 months or so because once the rally fails I believe the bottom drops out. The other "1% chance" could surely happen so don't put off your preparations because of the napkin "odds making".
As far as default goes... it will happen one way or the other.
Either by not raising the debt limit and actually defaulting or by monetizing the Dollar to oblivion. This opinion is now much more widespread than a few years ago, the scary thing is that it is somewhat widespread and yet we have not had a panic yet. The only explanation is that the "big boys", the ones who trade änd own "CDS" know the game is up but can't do anything about it.
They are trapped. Those that originally sold CDS and are responsible for "performing" (paying) cannot and those who own this crap AIN'T GONNA GET PAID! PERIOD WITH A HUGE EXCLAMATION POINT!!! They ALL know this.
The entire global financial system has been built on the solvency of the U.S. government and our Treasury Secretary as much as admitted this morning that he would "gladly pay you Tuesday for a hamburger today".
This is it folks, we are broke. We know it, the government knows it, foreigners and foreign governments know it. Everyone knows it. Anything can happen at any time from here on in. There is no way to forecast a timeline nor an "order" of events. Just know that as "good and easy" as it was and as far above a prudent standard of living we "lived", it wil be at least that bad.
The Piper, otherwise known as Mother Nature wants payment, paying up for all the years of fantasy will not be easy. The one bright point in this is that we will by necessity have to go back and learn basic values such as a day's pay for a days work. Government handouts will no longer exist.
www.LeMetropoleCafe.com
DavidPierre, in other words, you are describing a system on the cusp of going non-linear. No one knows where it might end up.
Dup. Darn iPad.
there will be no defaut/defation.....the FED will bailout every individual, village, town, county, state, country as well as corporate entities. Putting all the worlds worthless debt on it's balance sheet paid for with newly printed $'s..........soon the politicians of every political party of every nation will be begging him to as your "deflation" begins to consume everything. Why are debt and equity mkts relatively saguine? They know this is coming. Gold is the portal to the other side of this
+1 David
If I were to use an analogy, it seems that gold is acting like an ocean current which flows do to large scale environmental, climate and undersea topography factors whereas the market is like ocean surface conditions reacting to short term weather, temperature and tidal influences. Although both are powerful forces of nature that impact maritime navigation, you would be mistaken to correlate them if you are trying to cross a sea.
Liked it
$4.81/gal here in Ontario.
www.silvergoldsilver.blogspot.com
That is because gold doesn't track inflation, or QE . The rise in the price of gold expresses the contractionary effects of the present depression --a depression it has been signaling since 2001 .
Worked my ass off today using all Neanderthal genes at my disposal...then the government looters took half of my profits for no reason. Those sons a bitches then told me I was a racist and a coward because I make over xxx/year. Wow.. Anyway, I drive home to find gold at an all time high and I know I have made the right choices, my fortunes have only grown as the end comes to the takers.
http://www.bloomberg.com/news/2011-07-18/misery-index-at-28-year-high-on...
Another "quant" trying to fit the data to a predetermined opinion....take your data group back to 1966 on re-fit it....it might allow you to justify your 2 and 20.
Inflation is negative for Gold-
1080-2001 was all Inflation and Gold fell all through it-
http://bit.ly/oSiGIa
2001-something different happend-we know about the unleashing of Credit and the insanely levered up housing/toy and paper markets (credit money again) "Inflation"
So what did Gold see? not normal Inflation--
Gold seen "credit risk" and the Hyper-inflation of the Credit money system-
What does Gold see today?
It sees credit default risk = Deflation
Free floating Gold only works during times of high risk-
Hyper-inflation and Deflation-
We had the Hyper-inflation-now comes the enevitable Deflation and Gold will rock-
her will be no defation.....the FED will bailout every individual, village, town, county, state, country as well as corporate entities. Putting all the worlds worthless debt on it's balance sheet paid for with newly printed $'s..........soon the politicians of every political party of every nation will be begging him to as your "deflation" begins to consume everything. But you are right about gold...it will rock !
Savings rate up-deflationary
http://research.stlouisfed.org/fred2/series/PSAVERT
Loans contracted from 1.6 trillion to 1.2 trillion-deflationary
Decrease in credit outstanding-deflationary
http://research.stlouisfed.org/fred2/series/TOTALSL
real-estate loans decreasing--deflationary
http://research.stlouisfed.org/fred2/series/REALLN
Household blance sheets decreasing--deflation
http://research.stlouisfed.org/fred2/series/TNWBSHNO
Loss in net worth from 14 trillion to 6 trillion-that's twice what Bernake's printed and that is genuine deflation-
Velocity has collapsed and proves the decrease in circulating money or credit supply
http://research.stlouisfed.org/fred2/series/MULT
http://research.stlouisfed.org/fred2/series/M2V
Thanks for the opposing view point. However, I have a couple of issues:
From the graph you provided, personal savings rate is at 5% and a downward trajectory.
Total consumer credit contracted 10% but is now rising.
Real estate loans have dropped 10% and seem to still be going lower so that is deflationary, but a lot of people are not paying their mortgage anymore which is inflationary.
Total net worth contracted from 65 tril to 50 tril but has since risen to ~58 tril and is pointing up which is inflationary.
The M1 multiplier is low and has been declining since the 80s. I know enough to say that is deflationary but I not enough to explain this. Perhaps, the large expansion of credit and government borrowing make up for it? Not sure.
M2 velocity has dropped from about a ratio of 1.95 at the peak of the last bubble to 1.7 but 1.7 seems like a normal value.
All in all, I think the short term contraction in credit after the bubble was deflationary. However, the money printing in response will ultimately turn things the other way. Keep pumping in cash and credit will start to expand and velocity will move up as people respond to higher inflation. It seems this has already started when you look at your Total Consumer Credit Outstanding chart. Just my 2 cents worth.
Yes-some of the indicators have begun to reverse-but have never broken out to the point that they're anywhere near their original trajectory-
As to the increase in Velocity-my question is-how will people get money or credit in their hands to spend?
Unemployment is ugly and remains so-businesses are not expanding and sentiment is fast changing to saving and not spending-
I haven't even mentioned the shadow banking system and the hundreds of trillions that sit levered negative in there-they may be hidden in level 3-unmarked-but they also sit in different funds all over the world-marked at full value-meanwhile they grow negative by the day-
Money printing is dwarfed by the size of contraction-if it wasn't-we wouldn't be talking about QE 3 etc.
I'm in the biflation camp, which implies a continued mild overall inflation, with continued weakness in housing/other debt instruments coupled by continued printing (to prop said debt instruments). Yeah, it doesn't work the way the Fed says it does (ie., stimulating the economy), but it does work the way they want it to work, which is to prop the zombies. This can really be done indefinately. I don't want that to be the case, but there is no plan B here. Honestly (and I know I'll get flamed to shit here), devaluation of the dollar (stealth tax) is the only way we're going to be able to pay this shit off, and the shit will be paid.
I think gold is functioning more off of (lack of) confidence in fiat currency. If the spigot is ON (QE), it's a plodding, slow erosion of confidence because the rising equities mask the real underlying weakness. But the fact that gold holds its own/strengthens in the absence of easing supports the notion that it's not about currency devaluation, but currency eradication. That there's a correlation with equities when QE is pumping isn't a surprise, but I don't think there's enough there to make any substantive inference..
The Bernank was (again) wrong...gold is money and the flywheel is turning as to the proportion of those waking up to that reality.
BTW, we can have hyper-inflation (loss of currency confidence, causing runaway prices for staples) and deflation of assets at the same time. We haven't hit hyper-inflation (yet), but the deflationary effects are pretty visible in the long-lived asset markets.
We keep dancing around the obvious - paper money only has meaning if there is something to consume. Otherwise it's meaningless. What came first, stuff or money? And what do the banks & guvmunt produce? Paper money - nothing else. And what does a true economy do - it uses capital & labor to produce STUFF. Money is supposed to be used to allocate that capital & labor to the most efficient producers.
And who is Bernanke the Bastard allocating the capital to? The banks. He's laying off the labor. And what are the banks allocating the capital that Bernanke the Bastard lends them for 0%? To gambling on CDS, CDO & other meaningless, useless financial derivatives that produce nothing.
One year of data?? This chart is useless.
A comparison of the Dow (or SPX) to gold ratio with inflation could go back many years easily.
That might yield a meaningful result.
In theory, practice and theory are the same; in practice they're not.
Y Berra
Gold is driven more by negative real interest rates than it is inflation. Try correlating it with bond yields.