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“Gold is due for a correction,” wrote U.S. Global Investors chief and Vancouver favorite Frank Holmes on Tuesday. “In fact, it would be a nonevent to see a 10% drop in gold.”
But commenting on the long-term trend, Frank figures we’re only two years into a long cycle in which gold will run ahead of the S&P 500
“This chart from Gold Stock Analyst,” says Frank, “pits the performance of gold bullion against the S&P 500 since 1971 — you can see that gold immediately rallied following Nixon’s announcement [cutting the dollar’s last tie to gold] before peaking at $850 an ounce in 1980.
“At that price, one ounce of gold was 7.6 times greater than the S&P 500, according to Gold Stock Analyst. Gold’s relative performance then declined for the next 20 years, with the S&P 500 taking the lead in 1992 and peaking at 5.3 times the value of gold in 1999. Currently, gold’s value is roughly 1.6 times greater than the S&P 500.”
“What drove gold’s relative underperformance from 1980 to 1999?” Frank goes on. “It was a shift in government policies, which have historically been precursors to change.”
In this case, it was Fed chief Paul Volcker’s pursuit of positive real interest rates… where money you tuck away in a Treasury note or a CD will earn you more than you lose in inflation. That finally came about in 1992… the same year the S&P 500 overtook gold on the chart.
Now? As we’ve talked about before, we’re in an environment of “financial repression” — where interest rates get eaten up by the cost of living, and then some. That’s bullish for gold.
Regards,
Addison Wiggin,
for The Daily Reckoning
Read more: A Dip in Gold http://dailyreckoning.com/a-dip-in-gold/#ixzz1W2HrhEYN