With the year coming to an end and gold retesting its July low around $1,150 per ounce I just thought I'd review where we are in markets relative to each other and what we should expect going forward into 2014.
Currently the US stock market as represented by the S&P 500 is up nearly 28% while gold is (ironically or purposely?) the mirror opposite at a loss of nearly 28%. Meanwhile the US Fed as left unchanged their unprecedented purchases/ printing of $85 Billion per month of monetary expansion.
To some extent it makes sense that markets would be up this year, if for no other reason, because the money supply is expanding so fast. If company earnings remained the same then the market would still need to reprice stocks to reflect the monetary expansion. This means higher prices to reflect the lower value of the dollar as the currency is diluted with new printing. This should be true of every good or service, all repricing to reflect a weaker dollar. But shouldn't this be true of gold too?
Consider this, the price of gold has historically been highly correlated with both the US national debt and the US monetary supply. You'll recall that prior to 1971 when Nixon closed the gold window, the US dollar was backed by gold and valued around $35 per ounce. An expanding monetary base and growing deficits caused by the Vietnam war and "Great Society" spending ended this relationship.
Below is a graph showing gold relative to the national debt:
Above is data I collected using the Federal Reserve of St Louis for the historic money supply and the Wold Gold Council for historic gold prices. From 1984 where the data starts, up to the end of 2010, the correlation is point eight four (.84). A very high correlation and likely slightly lower than if I had been able to acquire all the data going back to 1971.
(As a refresher, remember correlations range from -1 to +1. With zero being no relationship, one being a perfect relationship and -1 being a perfectly negative relationship)
But something happened in 2011. After four decades of very high correlation, the monetary supply and the price of gold broke their relationship. Below is a zoomed in graph starting at the year 2000.
After hitting a high in 2011 gold has fallen by a third to its present price of $1,223. The correlation since January of 2011 has dropped to -.34!! A negative correlation, breaking a thirty year trend! Does that make any sense? As the world reserve currency is being debased at its fastest pace ever, it actually buys more gold, not less (less dollars needed to buy an ounce of gold than before).
To show out just how crazy this is, Zerohedge points out gold is now trading below the price it takes to dig it out of the ground. This despite record demand for physical old and short supplies on the COMEX.
This can only be possible if Western Central Banks are intervening in the markets in an attempt to discourage people from exchanging their fiat currencies into hard assets like gold.
Meanwhile, Michael Snyder points out the party in stocks may not last forever:
One of the men that won the Nobel Prize for economics this year says that "bubbles look like this" and that he is "most worried about the boom in the U.S. stock market." But you don't have to be a Nobel Prize winner to see what is happening. It should be glaringly apparent to anyone with half a brain. The financial markets have been soaring while the overall economy has been stagnating. Reckless injections of liquidity into the financial system by the Federal Reserve have pumped up stock prices to ridiculous extremes, and people are becoming concerned. In fact, Google searches for the term "stock bubble" are now at the highest level that we have seen since November 2007.
Despite assurances from the mainstream media and the Federal Reserve that everything is just fine, many Americans are beginning to realize that we have seen this movie before. We saw it during the dotcom bubble, and we saw it during the lead up to the horrible financial crisis of 2008. So precisely when will the bubble burst this time? Nobody knows for sure, but without a doubt this irrational financial bubble will burst at some point. Remember, a bubble is always the biggest right before it bursts, and the following are 15 signs that we are near the peak of an absolutely massive stock market bubble...
#1 Bob Shiller, one of the winners of this year's Nobel Prize for economics, says that "bubbles look like this" and that he is "most worried about the boom in the U.S. stock market."
#2 The total amount of margin debt has risen by 50 percent since January 2012 and it is now at the highest level ever recorded. The last two times that margin debt skyrocketed like this were just before the bursting of the dotcom bubble in 2000 and just before the financial crisis of 2008. When this house of cards comes crashing down, things are going to get very messy...
"When the tablecloth gets pulled out from under the place settings, you're going to have a lot of them crash and smash on the floor," said Uri Landesman, president of Platinum Partners hedge fund. "That margin's going to get pulled and everyone's going to have to cover. That's when you get really serious corrections."#3 Since the bottom of the market in 2009, the Dow has jumped 143 percent, the S&P 500 is up 165 percent and the Nasdaq has risen an astounding 213 percent. This does not reflect economic reality in any way, shape or form.
#4 Market research firm TrimTabs says that the S&P 500 is "very overpriced" right now.
#5 Marc Faber recently told CNBC that "we are in a gigantic speculative bubble".
#6 In the United States, Google searches for the term "stock bubble" are at the highest level that we have seen since November 2007 - just before the last stock market crash.
#7 Price to earnings ratios are very high right now...
The Dow was trading at 17.8 times the past four quarters of earnings of its 30 components, according to The Wall Street Journal on Friday. That was up from 13.7 times its earnings a year ago. The S&P 500 is trading at 18.7 times earnings. The Nasdaq-100 Index is trading at 21.5 times earnings. At the very least, the ratios are signaling that stock prices are rich.#8 According to CNBC, Pinterest is currently valued at more than 3 billion dollars even though it has never earned a profit.
#9 Twitter is a seven-year-old company that has never made a profit. It actually lost 64.6 million dollars last quarter. But according to the financial markets it is currently worth about 22 billion dollars.
#10 Right now, Facebook is trading at a valuation that is equivalent to approximately 100 years of earnings, and it is currently supposedly worth about 115 billion dollars.
#11 Howard Marks of Oaktree Capital recently stated that he believes that "markets are riskier than at any time since the depths of the 2008/9 crisis".
#12 As Graham Summers recently noted, retail investors are buying stocks at a level not seen since the peak of the dotcom bubble back in 2000.
#13 David Stockman, a former director of the Office of Management and Budget under President Ronald Reagan, believes that this financial bubble is going to end very badly...
"We have a massive bubble everywhere, from Japan, to China, Europe, to the UK. As a result of this, I think world financial markets are extremely dangerous, unstable, and subject to serious trouble and dislocation in the future."#14 Bob Janjuah of Nomura Securities believes that there "could be a 25% to 50% sell off in global stock markets" over the next couple of years.
#15 According John Hussman via Tyler Durden of Zero Hedge, the U.S. stock market is repeating a pattern that we have seen many times before. According to him, we are experiencing "a well-defined syndrome of 'overvalued, overbought, overbullish, rising-yield' conditions that has appeared exclusively at speculative market peaks – including (exhaustively) 1929, 1972, 1987, 2000, 2007, 2011 (before a market loss of nearly 20% that was truncated by investor faith in a new round of monetary easing), and at three points in 2013: February, May, and today."Conclusion:
As I mentioned at the top of this article, this stock market bubble has been fueled by quantitative easing. Easy money from the Fed has been artificially inflating stock prices, and this has greatly benefited a very small percentage of the U.S. population. In fact, 82 percent of all individually held stocks are owned by the wealthiest 5 percent of all Americans.
When this stock market bubble does burst, those wealthy Americans are going to be in for a tremendous amount of pain.
But there are some people out there that argue that what we are witnessing is not a stock market bubble at all. That includes Janet Yellen, the new head of the Federal Reserve. Recently, she insisted that there is absolutely nothing to be worried about...
"Stock prices have risen pretty robustly," Yellen said. "But I think that if you look at traditional valuation measures, you would not see stock prices in territory that suggests bubble-like conditions."
My view is that most markets are in a huge, unsustainable bubble. By any traditional metric stocks are over valued. Meanwhile, gold is at a 30-40% discount based on its traditional relationship with the US national debt and money supply.
The intervention of Western Central Banks has provided a once in a lifetime opportunity to buy gold at a huge discount to its intrinsic value.