With the US$ gold price near a 5-year low, the above question probably seems strange. However, the US$ isn’t the only measure of price.

It is also reasonable to measure gold’s price in terms of other commodities. This is because although gold isn’t just a commodity, under the current monetary system its price should never become divorced from the prices of other commodities. Short-term divergences between gold and the broad-based commodity indices will occur in response to macro-economic developments, but, for example, there isn’t going to be a major upward trend in the gold price while the prices of most other commodities are in major downward trends.

When measured in terms of other commodities, gold’s current price is high. For example, the following chart shows that gold made a new 20-year high relative to the Goldman Sachs Spot Commodity Index (GNX) in January and has recently moved back to near its high.

And if we measure gold in terms of other metals rather than commodities in general, it’s a similar story. In particular, the following charts show that a) relative to the Industrial Metals Index (GYX) gold is only 6% below its 2011-2012 highs and within 15% of the 20-year high that was reached at the crescendo of the 2008-2009 global financial crisis, b) gold is at a 20-year high relative to platinum, and c) gold is close to the top of its 20-year range relative to silver.

Gold normally performs relatively poorly during economic booms and relatively well during economic busts. Gold’s current relatively high price is therefore indicative of a weak global economic situation.

If the global economic backdrop becomes superficially better over the months/quarters ahead and the Fed hikes interest rates as per its current tentative plan, then even if the gold price rises in US$ terms next year it will probably fall in terms of the broad-based commodity indices and most other metals. That, of course, is a big if.

There was a post at ZeroHedge.com on 20th November titled “Fed To Hold An “Expedited, Closed” Meeting On Monday“. The title suggests that something strange is afoot, that is, that the Fed is up to something out of the ordinary. Hence the emphasis on the words “Expedited” and “Closed”.

To make sure that its readers get the message, the post goes on to state:

“Given how awesome everything appears to be, judging by stocks and the tidal wave of FedSpeak of the last week confirming that rates are rising in December, we found it at least marginally ‘odd’ that out of the blue, the Fed would announce an ‘expedited, closed’ meeting on Monday…”

Odd? Out of the blue? Really?

The author of the ZeroHedge post forgot to mention that these “expedited, closed” meetings happen with monotonous regularity. The one scheduled for Monday 23rd November will be the third one this month. And there were four in October, three in September, two in August and five in July. You can find the notice for the coming meeting and the records of previous similar meetings at http://www.federalreserve.gov/aboutthefed/boardmeetings/201511.htm.

Even the topic under discussion at the 23rd November meeting will be routine. The purpose of the meeting is: “Review and determination by the Board of Governors of the advance and discount rates to be charged by the Federal Reserve Banks.” A meeting with the same purpose happens every month. For example, there was one on 26th October, one on 15th September, one on 31st August and one on 27th July.

Always be aware of the agenda/bias of the news sources you use.

In a typical commodity market the traders known as “commercials” are usually hedging their exposure to the physical commodity when they buy or sell futures contracts. For example, in the oil market the most important “commercials” include oil producers, who are naturally ‘long’ the physical commodity and often sell futures contracts to hedge this exposure, and manufacturers of oil-based products, who are effectively ‘short’ the physical commodity (by virtue of the fact that oil is one of their biggest costs) and often buy futures contracts to hedge this exposure. However, the gold market is different.

Some of the commercial traders operating in the gold market are traditional hedgers. Mining companies and jewellery manufacturers, for example. But given that the existing aboveground stock of gold dwarfs the annual supply of new gold and that the amount of gold that changes hands for store-of-value, investment and speculative purposes dwarfs the amount of gold bought/sold for more traditional commercial uses such as fashion jewellery and electronics, a reasonable and knowledgeable person would expect that traditional commercial traders would play a relatively small role in the gold market. A reasonable and knowledgeable person would be right.

In the gold market the dominant commercials are not traditional hedgers. They are also not speculators, in that they rarely take positions that rely on the gold price moving in a particular direction. They are spread traders, meaning that they make their profits by trading the differences in price between the physical and futures markets.

For example, if speculative buying of gold futures causes the futures price to rise relative to the spot price by a sufficient amount it will create an essentially risk-free arbitrage opportunity for a commercial to sell the futures and buy the physical, and if speculative selling of gold futures causes the futures price to fall relative to the spot price by a sufficient amount it will create an essentially risk-free arbitrage opportunity for a commercial to buy the futures and sell the physical. For another example, if gold buying by hoarders of physical gold causes the cash (physical) price to rise relative to the futures price by a sufficient amount it will create an essentially risk-free arbitrage opportunity for a commercial to sell the physical and buy the futures, and if the ‘dishoarding’ of physical gold causes the cash (physical) price to fall relative to the futures price by a sufficient amount it will create an essentially risk-free arbitrage opportunity for a commercial to buy the physical and sell the futures. In other words, commercial trading in the gold market is mostly about arbitrage.

The difference between commercial trading in the gold market and commercial trading in all other commodity markets is tied to gold’s long history as money. Strangely, many gold ‘experts’ assert that gold is different due to its dominant monetary and store-of-value roles, but then insist on applying a traditional commodity-style method of supply-demand analysis. Unsurprisingly, the result is a pile of hogwash.

The following charts relate to comments on the gold and silver markets that will be emailed to TSI subscribers later today.