Thursday, September 23, 2010

Is the Gold Run Done?

There has been much debate about whether Gold has been rising due to it being a caveat currency or an inflation hedge or a deflation hedge. Allow me to posit that there is some evidence that Gold's rise is at least partially due to current and expected level inflation from reviewing charts of the CRB index, the euro the dollar and gold prices.

Gold - Continuous Contract

Gold Priced in Euro's - Continuous Contract

It is clear from the Gold charts above that Gold has been trending higher in both US dollars and in euro terms for quite some time. But what about inflation?

CRB Index

CRB Index Priced in Euro's
The CRB Index, a measure of inflation, shows a rising trend in both dollar terms and euro terms from about March 2009 through to the end of the year correlating well with Gold in both currencies. After that there was some divergence as the inflation measure in euro's continued the rising trend through to May 2010. During those 5 months the CRB in dollar terms fell slightly then basically moved sideways. All during this time Gold has been rising in both currencies. Since June the CRB in both currencies has been in a slow trend higher narrow ranges in ascending triangles currently testing the top in dollar terms but waning in euro terms as the euro gains strength. Both however are well above their bottom levels from December 2008 and March 2009. As the CRB approaches the apex of these triangles it may be getting ready for a move. Which way? And interesting that the CRB and Gold have been inversely correlated over the last few months. Without those last few months it would seem there is a correlation and therefore Gold buying would be a hedge for inflation. How to get some clarity?

CRB Priced in Gold

Look at the chart of the CRB priced in terms of Gold. This chart shows a clear downward trend since shortly after the long term uptrend in Gold in both currencies began around May 2009. This indicates that purchasing Gold has been a mitigant globally to rising inflation. From this chart it is also clear that in terms of Gold, the inflation measure is almost back to its lows from the early 2009. Will the ratio go below the March 2009 low? It seems we will have an answer very soon as it is within a descending triangle and starting a symmetrical triangle within it that look to resolve in late October at the latest. But with the prospect that the CRB will break out one way or the other, and continued concern over global stability fuel caveat currency buying, I would not be selling Gold bars just yet. It may be getting ready for a much steeper slope.

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