Stagflation Threatens Western Economies – Gold a Bubble, to Correct or Go Parabolic as Per 1970s?

All major currencies have fallen against gold today with the euro down 1% against gold on nervousness ahead of the Franco German summit. Gold is trading at USD 1,776.70, EUR 1,235.10, GBP 1,084.10, CHF 1,389.90 per ounce and 136,450 JPY/oz.  Gold’s London AM fix this morning was USD 1,779.00, EUR 1,236.18, GBP 1,086.81 per ounce.


Gold in U.S. Dollars – January 2009 to August 2011 – Daily and 50 and 144 Day Moving Averages

U.K. inflation accelerated more than economists forecast in July, as the cost of food, clothes, footwear, housing maintenance and rent increased. Negative real interest rates are getting worse as the BOE has kept interest rates at a record low of 0.5%.

5% inflation in the UK is expected in the coming months prior to hopes that inflation will abate. UK economic activity grew at just 0.2% in the second quarter of the year suggesting an annual rate of growth of 0.7% over the past twelve months. 

Economic growth is faltering in all major economies with data this morning showing Eurozone and German GDP growth slowing.

Eurozone GDP rose 0.2% from the first quarter, when it increased 0.8% while German GDP growth fell by more than expected in the second quarter, dropping to a derisory 0.1%.     

Double dip recessions involving inflation and therefore stagflation seem increasingly likely.


Gold in British Pounds – 30 Days (Tick)

Gold is overvalued in trading terms in the short term as it has risen well above its moving averages and there is the risk of a correction from these levels.

The 144 day moving average (identified by Dominic Frisby of Money Week) has provided very strong support to gold since January 2009 and should provide strong support should a material correction materialize.

The 200 day moving average provided support from 2000 to 2008 but more recently the 144 day moving average has been strong support.

As we appear to be entering the second phase of gold’s bull market the 50 and 100 day may become more important support levels.

While acknowledging the risks of a correction, one must also acknowledge that given the scale of physical demand being seen internationally there is a real possibility that gold goes parabolic as it did during the stagflation of the 1970s.

Gold surged 49.7% in 1972, 73.5% in 1973 and by 60.1% in 1974. In the final phase of the bull market in 1979, gold surged 140% in just 12 months.

Gold’s recent rise of 20% per annum since 2000 and 25% rise so far in 2011 has been tame in comparison.


Cross Currency Rates

The conditions today are far more bullish than in the 1970s as in the 1970s the U.S. was the largest creditor nation in the world whereas today the U.S. is the largest debtor nation the world has ever seen.

Gold went parabolic in the 1970s after a period of stagflation. Today, we appear to be on the verge of a period of stagflation.

The 1970s saw significant geopolitical risk with oil crisis, the overthrow of the Shah of Iran and the Russians invading Afghanistan. Today there is significant geopolitical risk in the world, arguably more, and there remains the real risk of a conflagration in the Middle East between Israel and its allies and Iran and its allies.

Today we have a global debt crisis, massive systemic risk in the financial system threatening the solvency of many banks and sovereign governments. This was not the case in the 1970s.

This makes a parabolic move in gold very likely in the coming days, weeks and months. Increasingly, the question is not if we go parabolic rather it is when do we go parabolic – in the weeks and months or in the coming years.

Prudent diversification and owning physical bullion remain key to weathering the coming difficult years.

For the latest news and commentary on gold and financial markets follow us on Twitter.

SILVER 
Silver is trading at $39.33/oz, €27.37/oz and £24.02/oz. 

PLATINUM GROUP METALS 
Platinum is trading at $1,810.50/oz, palladium at $741/oz and rhodium at $1,750/oz. 

NEWS
(Reuters)  
Gold rises 0.8 percent as euro zone jitters resurface

(Bloomberg)
Gold May Climb as Drop Attracts Buyers, Paulson Maintains Wager on Rally

(Reuters)
Gold steady; eyes on Franco-German summit

(MarketWatch)
Gold prices higher in Asia

COMMENTARY
(The Independent)  
Go for Gold: Yellow Metal Makes Return –

(Wall Street Journal)
The Nixon Shock Heard ‘Round the World

(Forbes)
Nixon’s Colossal Monetary Error: The Verdict 40 Years Later

(CNBC)  
Jim Rickards: Return to Gold Standard – Gold to be Revalued to $7,000

(Financial Times)
Time to question the dollar’s role as reserve

(MarketWatch)
Is it time for a gold standard revival?

 

 

Mark O'Byrne

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