[This blog post is an excerpt from a recent commentary at specuative-investor.com]

We consider gold bullion and the S&P500 Index (SPX) to be effectively at opposite ends of an investment seesaw, with the SPX doing better when confidence in money, central banking and government is rising and gold doing better when confidence in money, central banking and government is falling. As discussed in a few TSI commentaries and blog posts over the past two years (for example, HERE), our investment seesaw concept was part of the inspiration for the Synchronous Equity and Gold Price Model (SEGPM) created by Dietmar Knoll.

In general terms, the SEGPM uses historical data to define a quantitative relationship between the SPX, the US$ gold price and the US money supply. More specifically, it is based on the fact that adding the SPX to 1.5-times the US$ gold price (and applying a scaling factor) has, over the long-term, resulted in a number that tracks the US money supply. Consequently, it indicates the extent to which the combination of the US stock market and gold is currently under/over-valued compared to the money supply and can provide clues regarding likely future price levels for gold and the SPX. For example, a forecast of likely future levels for the SPX and the money supply would project a likely future level for the US$ gold price.

The following monthly chart shows our version of the SEGPM. On this chart, the red line is US True Money Supply (TMS) and the blue line is the Gold-SPX Model (the sum of the S&P500 Index and 1.5-times the US$ gold price, multiplied by a scaling factor).

The Model’s current message is that at today’s levels of the money supply and the SPX, the gold price (around US$2150) is in the right ballpark. A much higher ‘fair value’ for gold would require a larger money supply and/or a lower SPX. For example, if the money supply were 5% larger and the SPX were around 4200 (about 20% lower than it is today), the Model would indicate a ‘fair value’ for gold of around US$3200/oz.

In the middle of last year (the last time we discussed the Gold-SPX Model) we thought that the low-$3000s for the US$ gold price was a plausible target for the first half of this year. While it is not out of the question that this target will be reached during the first half of this year, this is no longer a likely scenario because the SPX has performed much better than we thought it would. However, there is a good chance that the low-$3000s will be reached before the end of this year.

[This blog post is a brief excerpt from a commentary published at speculative-investor.com last week]

The combination of the ISM Manufacturing New Orders Index (NOI) and the yield curve, our two favourite high-frequency leading indicators of US recession, has been warning of imminent recession since September-2023. Clearly, the warning has not been timely in that no recession has materialised yet. Furthermore, a month ago we noted that while the message of the yield curve was unchanged, the NOI had just risen by enough to move well above its recession demarcation level of 48. Although this did not cancel its recession warning (it would have to move above 55 to do so), January’s rise to 52.5 was unexpected. Have subsequent data provided useful new clues?

The answer is yes and no. The following monthly chart shows that the NOI turned back down in February, meaning that its recession warning is intact. At the same time, the SPX made a new all-time high as recently as Monday 4th March. As previously advised, it would be unprecedented for the SPX to make a new 52-week high AFTER the official recession start time.

This means that recession warnings remain in place, but the earliest time for the start of a recession has been pushed out again. Specifically, the March-2024 new high for the SPX suggests that a recession will not start any sooner than May-2024.

By our reckoning, during the first half of 2022 the US economy entered the bust phase of the economic boom-bust cycle caused by monetary inflation (rapid monetary inflation causes a boom that inevitably is followed by a bust as the receding monetary tide exposes the boom-time mal-investments). The bust phase almost always culminates in a recession, although it doesn’t have to.

So far, the performances of commodity prices in both US$ terms and gold terms are consistent with an economy in the bust phase, in that the GSCI Spot Commodity Index (GNX) made a 2-year low in US$ terms in December-2023 and currently is near a 3-year low in gold terms. The following daily chart shows GNX in gold terms. What’s not consistent with the bust phase are credit spreads, which have returned to their boom-time levels. Note that the narrowness of credit spreads and the strong upward trend in the stock market are linked, in that they are both symptomatic of a widespread view that a new boom will begin without a preceding severe economic downturn.

The above-mentioned conflict will have to be resolved over the months ahead by credit spreads widening substantially in response to evidence of economic weakness or by the prices of industrial commodities rising substantially in response to evidence that a new boom has been ignited. We think that the former is by far the more likely outcome.