Three Charts

by JDH on June 1, 2013

Today, I will let the charts speak for themselves.  To start, the Dow, for the last five years:


From the lows below 7,000 in 2008, the Dow has steadily risen, with a few bumps along the way, to over 15,000 today, more than doubling.  If the Dow is a proxy for the economy in general, everything is great.  One can only assume that unemployment is low, the government has no debt, and there are no wars or other problems anywhere in the world.

Yeah, right.

Next, a chart of the price of gold, for the last five years:


From the 2008 lows gold followed an even steeper trajectory higher than did the Dow, increasing from $700 to $1,900, but in late summer 2011 gold ran out of gas, and slowly consolidated until late 2012 when the decline picked up speed, dropping to the $1,300 level in April, 2013.

Gold stocks, leveraged to the price of gold, have fared even worse, as shown by a chart of RGL.TO – Royal Gold Inc., a blue chip gold stock, for that same five year time period:


From below $30 in 2008 Royal almost touched $100 in the fall of 2012, before dropping into the $50 range in April 2013, followed by a slight recovery in May.

What do these three charts illustrate? Simple: the government can print money, but they can’t print gold.


It’s not surprising that with massive money printing some of that money has found it’s way into stocks, so the Dow is higher.  Would those inflationary pressures not also increase the price of gold?  Yes, but not immediately.

Over on the Buy High Sell Higher Forum Sunseeker posted some excellent information on George Soros buying gold calls as a way to play a future increase in gold.  More specifically, it would appear that he sold his “paper” gold, GLD, and used the money to buy calls on real gold.  Interesting.

We all know that the paper gold market, the COMEX, is easily manipulated.  With paper money you can play with the market, but you can’t use paper to create real gold.  It would appear that current low gold prices are increasing gold demand from real investors.  Predictions are that gold demand in India will be high again this year.  Real people are buying real gold.

If real people are buying physical gold, ultimately the price of physical gold will increase.  It’s inevitable.  It may not be imminent, but it is inevitable.

The cure for low prices is low prices, and already we are seeing the premium on gold coins increasing. As physical becomes more scarce, dealers will charge ever greater premiums over the paper price for real gold.  Eventually the price increases.

So, while I am disappointed that the price of gold is not higher, I’m not in a panic.  I will deploy cash while prices are low, I will NOT buy on margin to risk getting a margin call if prices drop, and I will stay put.

At least until next week………..