com. hallojulie
Editor’s note: Originally published at tsi-blog.com On May 31, 2024
(This blog post is an excerpt from a recent commentary published on www.speculative-investor.com)
Gold is no longer money in the true sense of the word*, but it is still in circulation It is more like a currency than a consumer good, and therefore should be analyzed as a currency. In fact, in the currency hierarchy, we would put gold at the top, then the US dollar, then a big drop for the euro, and then another big drop for the other major currencies. Therefore, it makes sense to analyze the markets in terms of gold as well as in terms of the US dollar and other currencies, something we do regularly. For example, we pay close attention to the performance of the S&P 500 Index (SPX) and the commodity spot index (GNX) in terms of gold. now We will look at one aspect of the relationship between commodity prices in US dollars and commodity prices in gold.
The following chart compares the general level of commodity prices in terms of US dollars (as represented by GNX) with the general level of commodity prices in terms of gold (as represented by the GNX/Gold ratio). The point we want to highlight today is that since 1995, GNX has hit cycle lows in terms of the US dollar and gold at the same time. These important lows are indicated by the vertical blue lines drawn on the chart.
Both the GNX and GNX/Gold lows indicated by the vertical blue lines coincided with a recession and/or some form of debt crisis. Specifically, the April 2020 low coincided with the Covid crisis/recession, the January 2016 low coincided with the peak of the US shale debt crisis, the late 2011 low coincided with the Eurozone sovereign debt crisis, and early 2009 The decline coincided with the peak of the global financial crisis, the January 2007 low coincided with the peak of the initial phase of the housing/mortgage crisis in the United States, and the early 2002 low coincided with the collapse of the dot-com stock bubble and the end of the 2002 recession. 2001, and the decline in late 1998 coincided with the peak of the Russian debt crisis and the LTCM explosion.
If past is prologue, GNX will not bottom in USD until it bottoms in gold. So, has GNX bottomed out compared to gold?
As mentioned previously, the GNX-to-gold ratio has in the past bottomed out in tandem with a recession and/or some form of debt crisis, both of which are likely outcomes over the next 12 months, but neither of which have occurred during the current cycle. Therefore, there is a good chance that the GNX bottom is still ahead and that the recent commodity rally is a counter move within an ongoing cyclical decline.
*Money is defined by its function, not its physical characteristics. It is the general medium of exchange or medium of exchange commonly used within an economy. This means that if something is money, it will be readily accepted by almost everyone in exchange for goods, services, debts and assets. Other definitions have been prepared in an attempt to prove that gold is still money, but all of these are impractical.
Editor’s note: The summary points for this article were selected by Seeking Alpha editors.
