Chris Powell of GATA has taken issue with my recent blog post titled “Four charts that invalidate the gold price suppression story“. Interestingly, he did so without addressing the most important information in my short post. Instead, he dismissed the information because it was presented in chart form and simply regurgitated the usual GATA rhetoric*.

Responding to Powell’s article is not a good use of my time. This is not because my time is so precious, but, as mentioned above, because Powell’s article sidesteps the main points. If he develops an understanding of gold’s fundamental price drivers and employs this understanding to demonstrate errors in my thinking, I’ll gladly respond.

However, just to set the record straight:

1) I don’t have anything against technical analysts, but I’m not one of them. I do use some TA, but I’m primarily a fundamental analyst. Unbeknownst to Chris Powell, charts can be used to show fundamental relationships.

2) If my main purpose in writing was to increase the number of subscribers to my newsletter then I would pay lip service to GATA’s arguments. The reason is that I have lost many subscribers over the years due to my regular disparaging of these arguments. While I don’t go out of my way to lose subscribers, this is not a major concern because I am a trader/investor who happens to write a newsletter as opposed to someone who relies on newsletter sales to make a living.

3) Unlike Chris Powell, I am not promoting an agenda. I am not trying to sell a particular view of the financial world. Instead, I’m focused on trying to understand why the markets do what they do and profiting from it. Sometimes I get it right, sometimes I get it wrong. When I get it wrong, I acknowledge that the blame is 100% with me and try to learn from the experience so that the mistake is not repeated.

*He used exactly the same tactic in response to a previous blog post of mine.

Every experienced trader knows that the financial markets are manipulated. They always have been manipulated and they always will be manipulated. Railing against gold-market manipulation is therefore akin to railing against the Earth revolving around the sun. Moreover, the attempts to manipulate, which, by the way, will be designed to move prices upward just as often as downward, will never be effective beyond the very short-term. As evidenced by the following charts, there is certainly no sign of a successful long-term gold-price suppression scheme.

The first chart compares the US$ gold price with the bond/dollar ratio (the T-Bond price divided by the Dollar Index). This chart shows that the gold price has roughly done what it should have done, considering what was happening in the currency and bond markets, each step of the way over the past 10 years.

The next chart compares the US$ gold price with the SPX/BKX ratio (the broad US stock market relative to the banking sector). Those who understand gold would expect to see a positive correlation between the gold price and the SPX/BKX ratio, because gold should benefit from falling confidence in the banking sector and become less desirable during periods when investors are becoming increasingly confident in the banking sector’s prospects. There are naturally periods of overshoot and undershoot, but a positive correlation is readily apparent.

The third chart compares the US$ gold price and the Yen (the Yen/US$ rate). The gold price held up much better than the Yen during 2013-2015, but the positive correlation has been maintained.

Due to the Yen carry trade, gold’s positive correlation with the Yen has been stronger than its negative correlation with the Dollar Index for at least the past 10 years. The Yen carry trade causes the Yen to behave like a safe haven (even though it isn’t one), because carry trades tend to get put on during periods of rising confidence and taken off during periods of falling confidence.

The final chart simply shows the gold/commodity ratio (gold relative to a basket of commodities represented by the Goldman Sachs Spot Commodity Index – GNX). This chart indicates that relative to commodities in general gold is almost 3-times as expensive today as it was 10 years ago. Also, for anyone who clearly remembers what happened in the financial world over the past 10 years it reveals that large and sharp rises in the gold/commodity ratio occurred exactly when they should have occurred — during periods of crisis and plunging confidence. Specifically, there were large and sharp rises: a) from mid-2015 through to early-February of 2016 as equity markets tanked around the world, b) in late-2014 and early-2015 as the financial markets fretted over what the ECB was going to do, c) in the second and third quarters of 2011 in parallel with a substantial stock-market correction and rising fears of euro-zone government debt default, and d) from mid-2008 through to February-2009 in response to the Global Financial Crisis.

By the way, gold is in a multi-generational upward price trend relative to commodities that dates back to 1971.

I look at a lot of charts comparing gold’s performance with various financial-market and economic indicators, only four of which are presented above. The overarching message is that if gold has been subject to a long-term price suppression scheme, the scheme has been totally unsuccessful.

Almost anything can be a good investment or a bad investment — it all depends on the price. Relative to the prices of other commodities the gold price is high by historical standards and in dollar terms gold is nowhere near as cheap today as it was 15 years ago, but considering the economic backdrop it offers reasonable value in the $1200s. Furthermore, considering the policies that are being implemented and the general lack of understanding on display in the world of policy-making, there’s a good chance that gold will be much more expensive in two years’ time.

The policies to which I am referring are the money-pumping, the interest-rate suppression and the increases in government spending that happen whenever the economy and/or stock market show signs of weakness. These so-called remedies are actually undermining the economy, so whenever they are applied in response to economic weakness they ultimately result in more weakness. It’s not a fluke, for example, that the most sluggish post-recession economic recovery of the past 60 years went hand-in-hand with history’s most aggressive demand-boosting intervention by central banks and governments.

It’s a vicious cycle that can aptly be called the ‘Keynesian death spiral’. The Keynesian models being used by policy-makers throughout the world are based on the assumption that when interest rates are artificially lowered and new money is created and government spending is ramped up, the economy gets stronger. The models are completely wrong, because falsifying price signals leads to investing errors and therefore hurts, not helps, the overall economy, and because the government doesn’t have a spare pile of wealth that it can put to work to create real growth (everything the government spends must first be extracted from the private sector). However, the models are never questioned.

When a sustained period of economic growth fails to materialise following the application of the demand-boosting remedies, the conclusion is always that the remedies were not applied with sufficient vigor. More of the same is hence deemed necessary, because that’s what the models indicate. It’s akin to someone with liver damage caused by drinking too much alcohol being guided by a book that recommends addressing the problem by increasing alcohol consumption. A new dose of alcohol will initially make the patient feel better at the same time as it adds to the existing damage, just as a new dose of demand-boosting intervention will initially make the economy seem stronger at the same time as it gets in the way of genuine progress.

The upshot is that although gold is more expensive today than it was 15 years ago, the level at which gold offers good value is considerably higher today than it was back then because we are now much further along the Keynesian death spiral.

When the central bank lowers interest rates in an effort to prompt greater current spending it brings about a wealth transfer from savers to speculators of various stripes. While this is unethical, in economics terms the ethical problem isn’t the main issue. The main issue, and the reason that monetary stimulus doesn’t work as advertised, is TANSTAAFL (There Ain’t No Such Thing As A Free Lunch). At a very superficial level (the level at which all Keynesian economists operate) the interest-rate suppression policies appear to provide a free, or at least a very cheap, lunch, but the bill ends up being much higher than it would have been if it had been paid up front.

The likes of Bernanke, Yellen, Draghi and Kuroda admit that their so-called “monetary accommodation” hurts savers in the present, but they claim that the benefits to the overall economy outweigh the disadvantages to savers. Central bankers are apparently — at least in their own minds — endowed with a god-like wisdom that enables and entitles them to determine who should become poorer and who should become richer, all with the aim of elevating the economy. For example, here’s how the ECB justified its interest-rate suppression policy in June of 2014:

“The ECB’s interest rate decisions will…benefit savers in the end because they support growth and thus create a climate in which interest rates can gradually return to higher levels.”

And:

“A central bank’s core business is making it more or less attractive for households and businesses to save or borrow, but this is not done in the spirit of punishment or reward. By reducing interest rates and thus making it less attractive for people to save and more attractive to borrow, the central bank encourages people to spend money or invest. If, on the other hand, a central bank increases interest rates, the incentive shifts towards more saving and less spending in the aggregate, which can help cool an economy suffering from high inflation. This behaviour is not specific to the ECB; it applies to all central banks.”

It’s now two years later and the ECB is heading down the same policy path despite the complete absence of any success. The benefit that savers are supposedly going to get “in the end” appears to be even further away now than it was back then, although it is fair to say that European savers have definitely got it ‘in the end’.

Only the final sentence of the above excerpt is true (it’s true that the ECB is just as bad as other central banks). In order to believe the rest, you must have a poor understanding of economic theory.

‘Time’ is the most important element that central bankers deliberately or accidentally ignore when they make the sort of statements included in the above ECB quote. Increased saving does not mean reduced spending; it means reduced spending on consumer goods in the present in exchange for greater spending on consumer goods in the future. By the same token, reduced saving does not mean increased spending; it means increased consumer spending in the present in exchange for reduced consumer spending in the future.

Isn’t it obvious that this tradeoff between current and future consumer spending will happen most efficiently and for the greatest benefit to the overall economy if it is allowed to happen naturally, that is, if interest rates are allowed to reflect peoples’ actual time preferences? To put it another way, isn’t it obvious that if people are in a financial position where it makes sense for them to increase their saving (reduce their current spending on consumer goods) in order to repair balance sheets that have been severely weakened by excessive prior consumer spending, then the WORST thing that a policymaker could do is put obstacles in the way of saving and create artificial incentives for additional borrowing and consumption?

It obviously isn’t obvious, because monetary policymakers around the world continue to do the worst things they could do.