DMR–Gold back below $1290 on mixed market news

Gold dropped back below the $1290 mark in early trading. Silver is up marginally at $16.47. Market news is mixed with the dollar down, bonds steady, the stock market up and Treasury Secretary Mnuchin announcing “very meaningful progress” in the China trade talks. What precisely he means by that remains to be seen, but the stock and gold markets took him at his word – the former rising over 300 points and the latter dropping almost $6 to $1288.50.

Stepping back for a moment, it seems the list of problem areas continues to lengthen even as the White House manages to put a few on hold. The Trump administration has a lot of balls in the air – China, Iran, Europe, Russia and now the emerging countries as a group.  Items on the back burner, as we have seen in the past, can move to the front burner in a very short time frame, and areas seemingly under control can go out of control in a heartbeat.  Markets, including gold, are likely to remain unstable and on a hair trigger.

Quote of the Day
“Carrying on with current monetary policy brings with it the threat of inflation. And given economists’ lack of understanding of either the level of ‘potential’ or the inflationary process itself, it could easily get out of hand. However, inflation is not the only danger. First, debt ratios have been allowed to rise for decades, even after the crisis began. Moreover, whereas before the crisis this was primarily a problem of the advanced economies, it has since gone global. Second, tolerance of risk-taking threatens future financial stability, as does the narrowing of the profit margins for many traditional financial institutions. Third, the misallocation of real resources by banks and other financial institutions is encouraged by this monetary environment. With markets unable to allocate resources properly, due to the actions of central banks, the likelihood that rising debt commitments will not be honoured has risen sharply.” – William White, chairman of the Paris-based economic and development review committee at the Organization for Economic Co-operation and Development.

Chart of the Day

Chart note:  This chart is a follow-up to one posted last week on the performance of gold during the gold standard and fiat money eras.  It compares the performances of gold and stocks since 1971.  A $10,000 investment in gold in 1971 would be worth about $370,000 today. By comparison, a $10,000 investment in stocks in 1971 would be worth about $280,000 today. We should keep in mind too that gold is in the early stages of recovery from  a major sell-off while stocks are trading at all-time highs.

Warren Buffett made a rather noisy argument recently that stocks vastly outperformed gold since 1942.  A $10,000 stock investment in 1942, he says, would have become $51 million by 2018 – a figure that took many by surprise. That phenomenal return rests primarily on the compounding effect of reinvested dividends. What Buffett left out of the analysis, though, is the eroding effect of taxes and inflation.  Had he included it, those returns would have returned to Earth and the discussion on stocks and gold would have returned to the chart shown above.  A comparison between stocks and gold before 1971, when the gold price was fixed at $35 per ounce, is a pointless exercise.

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