"Inflation Is A Constant" by Ed Bugos (GoldenBar)
an excellent discussion of what inflation really is, how we can measure it now, including CRB commodities, bond yields, gold prices, and stock PEratios
this guy is growing on me monthly
he has written some excellent articles, great teaching style
gold-eagle.com
*** HIS CONCLUSIONS ***
Some important observations include:
- The entire bull market in gold stocks was marked not by a period of rising inflation, which was a constant, but of rising inflation expectations (implied by rising bond yields 1947-1981), and currency debasement
- There is a strong inverse relationship between gold share values and broad market values (even stronger relative to earnings multiples)
- There is a strong positive correlation between bond and broad stock market values (or between bond yields and gold share values)
- The long term trend in prices and currencies reveals Mises was right about a secular dollar devaluation interrupted by boom periods - usually manifesting in credit expansions
- The cycles in yields and dollar devaluations or plateaus last anywhere from 15 to 40 years - they average about 25 years (the current one is 20 years old)
- The gold share bull market began after the major market peak this time around, while it began six years ahead of the sixties peak last time
- The only two periods since 1959 where deflation was actually a threat were 1968 and 1992 - in both years, gold corrected, as it should (and as opposed to some of the popular arguments today)
If we used the seventies as a model for the most likely direction of the economy today - which I think is very appropriate - and assumed a similar devaluation in the dollar (and bull market in gold), the upside in gold shares is probably enormous. According to the extent of gains in the Barron's gold stock index back then, we could expect up to a 20-fold increase in the value of gold stocks on average over the next ten years or so.
Maybe the AMEX Gold bugs index will go to 1000. I don't know. For now, we'd be happy with 225. I think much depends to what extent the Fed can fool people from perceiving the inflation for what it is - a constant.
If you accept that equity valuations (as opposed to simply stock prices) have mostly peaked, and you reject the deflation model, the bulk of the evidence suggests that:
- Gold stocks are on their way to higher ground (in their first wave so far)
- The dollar will continue to devalue, and
- The 20 year bond bull market is nearing an end
/ jim |
