For Valentine's Day, a little something for you who love silver.
Or gold
A couple of weeks ago, Wheaton Precious Metals released a very useful study on the gold-silver ratio. Today I would like to take a look at some of its implications.
The most important implication is one that everyone needs a little time to absorb. That is that there is no characteristic value for the gold-silver ratio.
That means that there is no "true north", or no mythic value (16, for instance) to which it is attracted, and to which it would return if only the world stopped manipulating its price.
The Wheaton conclusions are quite definite. The gold-silver rises during deflationary periods and disinflationary periods (we'll look at this distinction shortly). The gold-silver ratio falls during inflationary periods.
What is unclear is whether a rising GSR causes deflation, or deflation causes a rising GSR. I know which one I believe.
Let's test this against some measures I've used for deflation/inflation. I'll use the weekly chart of USDX vs gold price, weekly, going back to the beginning of 2008.
It is a busy visual, but what we want to do is look at longer-scale variations. Intervals when both the USDX index and the gold price rise are considered deflationary. If gold rises and the US dollar index falls, we have inflation (hence inflation and deflation are not opposites). Gold falling and the dollar rising will be disinflation, and I suppose that if both gold and the US dollar fall, we must have disdeflation, although I have never seen that word anywhere. It's a little hard to say, so it might be best to leave it nameless, and remember that if it ever happens, you should be shorting gold stocks.
Through most of 2008, the graph above suggests we were experiencing disinflation, and over that interval, GSR rises from 55.7 to 77.1
Much of 2009 was characterized by inflation, and the GSR fell from 77.1 to 63.3.
Until the middle of 2010, we had disinflation, and the GSR rose slightly.
The big inflationary pulse into late 2011 saw the GSR falling to 40.8. The final blow-off in the gold price did not see any movement in the US dollar index, so it technically lies between inflation and deflation, but I don't know what to call it. The GSR actually rose during that interval, which makes some sense as the gold price rose over $200 in that time.
The following disinflationary episode that lasted through 2013 saw the GSR rise to 65.9.
Since then, the dominant trend has been deflationary, although realistically there have only been two deflationary pulses--through early 2015 (GSR 74.5) and over the past 18 months (GSR at 88.6). Most of the time has been consumed by short inflation-disinflation cycles, with slight rises and falls of the GSR without significant trend.
Over the entire chart (twelve years) the big picture is deflation, but most of that has been accommodated through cycles of inflation and disinflation.
So long as deflationary conditions persist, the GSR may rise without limit. As long as debts are created beyond any ability to repay them, deflationary conditions will rule. Under such conditions, despite the GSR being pretty much the highest in history, gold remains a better investment than silver.
However, as much of the actual deflationary effect is brought about by cycles of inflation and disinflation, there are brief intervals where silver makes a better investment than gold. But rather than using the level of the GSR as your selection criterion, you need to look closely at monetary policy instead.
Or gold
A couple of weeks ago, Wheaton Precious Metals released a very useful study on the gold-silver ratio. Today I would like to take a look at some of its implications.
The most important implication is one that everyone needs a little time to absorb. That is that there is no characteristic value for the gold-silver ratio.
That means that there is no "true north", or no mythic value (16, for instance) to which it is attracted, and to which it would return if only the world stopped manipulating its price.
The Wheaton conclusions are quite definite. The gold-silver rises during deflationary periods and disinflationary periods (we'll look at this distinction shortly). The gold-silver ratio falls during inflationary periods.
What is unclear is whether a rising GSR causes deflation, or deflation causes a rising GSR. I know which one I believe.
Let's test this against some measures I've used for deflation/inflation. I'll use the weekly chart of USDX vs gold price, weekly, going back to the beginning of 2008.
It is a busy visual, but what we want to do is look at longer-scale variations. Intervals when both the USDX index and the gold price rise are considered deflationary. If gold rises and the US dollar index falls, we have inflation (hence inflation and deflation are not opposites). Gold falling and the dollar rising will be disinflation, and I suppose that if both gold and the US dollar fall, we must have disdeflation, although I have never seen that word anywhere. It's a little hard to say, so it might be best to leave it nameless, and remember that if it ever happens, you should be shorting gold stocks.
Through most of 2008, the graph above suggests we were experiencing disinflation, and over that interval, GSR rises from 55.7 to 77.1
Much of 2009 was characterized by inflation, and the GSR fell from 77.1 to 63.3.
Until the middle of 2010, we had disinflation, and the GSR rose slightly.
The big inflationary pulse into late 2011 saw the GSR falling to 40.8. The final blow-off in the gold price did not see any movement in the US dollar index, so it technically lies between inflation and deflation, but I don't know what to call it. The GSR actually rose during that interval, which makes some sense as the gold price rose over $200 in that time.
The following disinflationary episode that lasted through 2013 saw the GSR rise to 65.9.
Since then, the dominant trend has been deflationary, although realistically there have only been two deflationary pulses--through early 2015 (GSR 74.5) and over the past 18 months (GSR at 88.6). Most of the time has been consumed by short inflation-disinflation cycles, with slight rises and falls of the GSR without significant trend.
Over the entire chart (twelve years) the big picture is deflation, but most of that has been accommodated through cycles of inflation and disinflation.
So long as deflationary conditions persist, the GSR may rise without limit. As long as debts are created beyond any ability to repay them, deflationary conditions will rule. Under such conditions, despite the GSR being pretty much the highest in history, gold remains a better investment than silver.
However, as much of the actual deflationary effect is brought about by cycles of inflation and disinflation, there are brief intervals where silver makes a better investment than gold. But rather than using the level of the GSR as your selection criterion, you need to look closely at monetary policy instead.
Your chart is one hell of a brain exercise. Are you a robot?
ReplyDeleteUnknown:
ReplyDeleteCheck out what an X-Y plot is. It is covered in high school math and science texts.
This is an X-Y plot of two values over time. These have the points connected with lines to show time order of points.
Because it is financial and/or economic data it is sporadic or has a large component that looks random. Economics and financial stuff have a huge number of variables and players effecting things. It is not like a simple scientific relation that fits a curve.
Now, I will let you in on a very good trick. If you see an economic graph and every thing is smooth and there are no points what you see is mere theory with lots of assumptions. And, often the theory does not match reality. But... If you see a graph with points you are looking at actual data!
Hey Rhodium is up above bitcoin again! 10K per dolla an ounce!
ReplyDeleteApplications of Rhodium are:
https://www.kitco.com/charts/historicalrhodium.html
"Rhodium is used to make electrical contacts, as jewelry and in catalytic converters, but is most frequently used as an alloying agent in other materials, such as platinum and palladium. These alloys are used to make such things as furnace coils, electrodes for aircraft spark plugs and laboratory crucibles."
https://education.jlab.org/itselemental/ele045.html
"The primary use of this element is in automobiles as a catalytic converter, changing harmful unburned hydrocarbons, carbon monoxide, and nitrogen oxide exhaust emissions into less noxious gases. Of 30,000 kg of rhodium consumed worldwide in 2012, 81% (24,300 kg) went into this application, and 8,060 kg was recovered from old converters. About 964 kg of rhodium was used in the glass industry, mostly for production of fiberglass and flat-panel glass, and 2,520 kg was used in the chemical industry.[31]"
https://en.wikipedia.org/wiki/Rhodium#Applications
Rhodium in Commodities Boom or the 'commodities super cycle':
"Later on, the mysterious and unexpected Rhodium price bubble of 2008 suddenly increased prices from just over $500/oz in late 2006 to $9,000/oz-$9,500/oz in July 2008,[65] only for the price then to tumble down only $1,000/oz in January 2009.[65][75] Both an increase in demand in the American automotive industry, a herd instinct among investors, a then bullish market in rare metals and a rogue speculator or rogue speculators on Wall Street were all at least partly to blame for the sudden rise and fall in the rare metal's price.[76]"
https://en.wikipedia.org/wiki/2000s_commodities_boom#Rhodium
Quoting Jim Rogers et al. "Nothing cures high prices like high prices." I think that quote works the other way but slower.
Quite the mental workout. Thank you. I'm still getting my head around it.
ReplyDeleteIf we take the strength of the dollar as a proxy for global credit conditions (loose to tight) and the gold price as a proxy for the global price level (aggregate XS supply to XS demand), there is a certain intuitive elegance to it.
The plot reflects the policy-track between four 'strange attractors'. Of course, cause and effect are moot; we have only conjunction. But it seems to me that the combo of XS supply (low gold price) and ultra lax policy (low dollar and rates) so-called "dis-deflation" is aka "depression". It is exactly what we had in the 30s - and what we tried to avert in 2008-9.
What is intriguing about the GSR is that it doesn't seem to be playing ball by past standards. There must be some non-stationarity going on. How come?
Well, the clue may lie in the distinguishing features of gold and silver: the one a true-money proxy; the other an industrial feedstock. Our era is marked by traded goods deflation and XS investment emanating from China. Under these circumstances our quadrants, just like in the 30s, are under stress. No one wants to end up in Quadrant III.
Countries have tried cycles of successive competitive devaluation against an obliging dollar ("devalue or deflate") and most have nearly burned out monetary easing now. (When I read about it I never expected to witness a Keynesian "liquidity trap"). Just maybe, while gold's financialisation is as good as ever, the grey metal has just increasingly got pitched in with the 'grey water' of industrial effluent; banal stuff in over-supply?
The world is crying out for a bit of inflation to get it out of the III vortex - that's the sucking sound we hear now. It's why western blue-collar workers haven't been having a ball. And it's why populist policies have made ground. Populism and beggar-my-neighbour policies are made for inflation and all the fun of 70s supply-side bottlenecks.
In the scheme of things, perhaps we need to imagine a third dimension coming out of the chart, right at us, called 'growth'. Outsourcing all our real growth to China is about as satisfying as delegating someone to have lunch for us. Quadrant III is a black hole. But in which other quadrant lies our best escape?
The current aggregate COVID-19 growth (supply-demand) shock is worse because it will pull the rug out from under the debt overhang like pulling your self-isolating bean-can from the bottom of the stack. Then I guess it's helicopter-money time (at best), and Jim Rogers may stalk the Earth once more (where has he been?). Because any commodities at all in limited or fixed supply will go up in price again when the money-hose is on. And gold may just be primus inter pares, again... Or am I dreaming?
What's that? Lunch?