Gold's New Record

Another record high today for gold.

While my portfolio rejoices at the performace of the yellow metal, it is with mixed feelings I watch the steady climb toward $1400, $1600, $2000, who knows?
We need to ask ourselves, what does this amazing performance of gold mean?

Let's turn to the bond market and examine the gold to bond ratio:

We see that the ratio has again broken the 200 day MA which over the long term from 2001 to 2010 has acted as a support level for this ratio.


What does this mean?
When gold is outperforming bonds, the gold to bond ratio rises.  When bonds outperform gold, the ratio declines.

If we look at some long term results going back to 1980 we see two distinct trends:

We notice that bonds did well against gold for the 20 year period from 1981 to 2001.
Since then, gold has massively outperformed bonds.
What is concerning, is the current high levels of the ratio. Once we see a 10 to 1 ratio, we conclude that there is a very high level of fear in the market. Sovereign bonds, those bastions of wealth protection, are losing their luster.

Why?

In my view, investors are weary of low yielding asset classes. Further, many investors are asking the question - how "safe" is sovereign debt? If we look at history, governments always, always default on their debts when they are unable to raise taxes high enough or reduce spending enough to met their obligations, and end up giving the bond holders a haircut.

We have seen examples of this in mid 16th century France, Spain, and Portugal, the UK in 1932, Argentina almost continually, and in the USA in the 1930s.

In fact, even before there was a bond market, we look at the Roman Empire that debased its silver coinage with copper over a period of many years as a defacto default on its obligations.

So we can conclude that a rapidly rising gold to bond ratio tells us something.

Something is just not right.

“The modern mind dislikes gold because it blurts out unpleasant truths.”
– Joseph Schumpeter