Japan bucked the trend of bleak news this week by reporting GDP growth of 3.5% for the first quarter. While three-and-a-half percent growth cannot be considered a boom, it might feel like one in Japan. Their economy has never really recovered from the tsunami, and until this welcomed first quarter news, has contracted for six consecutive months.
New Prime Minster Shinzo Abe won election on an easy money platform. He advocated that QE would make their currency more competitive in the global marketplace, and kick start an economy mired in recession. And he didn’t waste any time. Earlier this year Japan announced that they were jumping into the quantitative easing (QE) game.
As mentioned in On the Horizon, the debasing of the Japanese Yen caused the price of gold to rise there. This prompted many Japanese to cash-in their gold and buy things that they otherwise couldn’t or wouldn’t afford. The weaker Yen also made their goods (exports) cheaper to American consumers (importers.) This combination, more cash for Japanese consumers and higher demand for their exports, produced solid first quarter growth.
But did QE fix their market?
There is much speculation about this. After all, lots of people want to believe QE is the answer for everything with no ill effects. Japan’s economy also has a long track record of stopping shortly after it starts. This makes modern day Japan an interesting case study. It shows how monetary policy affects consumer behavior and GDP while also proving two long lasting truths: when the value of currency goes down the price of gold rises; and inflation has nothing to do with it.
So why does the price of gold continue to go down in a weak global currency market?
Gold is experiencing a correction: a normal readjustment of price to value based on mass market opinion. Indeed, there are some real shenanigans going on in the investment markets these days — gold included. But there’s more to it than that. Gold is down 19% this year. That’s a big number, and it has prompted some people to describe the move as a bear market, an end to an era, or a definite signal that the dynamics of gold have changed forever.
Those people can’t see the forest through the trees.
Below is a chart that can easily be misread. It is a one year chart of the Dow and gold using daily data points.
Those who have been following along know the true condition of this Market. They also know that the chart above is telling a different story. It looks to reflect a strong economy that is in expansion, with a stable underlying currency.
But that’s not the case in today’s economy.
As explained in my book, the 15-51 Indicator is an above-average portfolio designed and constructed to indicate how stock market strength is performing. It does this reliably – and as of now, is free from establishment manipulation. For that reason it tells a truer picture of stock market reality. The chart below is the same as the one above except the 15-51 Indicator is shown.
As you can see, stock market strength is also experiencing a correction. Since their peaks last September 2012, gold is down 24% and the 15-51 Indicator is off 20%. The Dow Average has yet to correct. It’s up a scary 17% for the year.
But twelve months does not make a track record. Below is a three year look of these three market gauges.
Investing successfully is about achieving objectives, making money, and sleeping well at night. And the easiest way to do that is to build a better portfolio, have a long-term perspective, and stay in tune with “the market.” That’s the purpose of these blogs.
Corrections occur because marketable securities become either over-valued or under-valued. It’s normal behavior. And yes, each security and portfolio has their own unique personality.
To make investment decisions in the moment for the moment is a decision made for all the wrong reasons in an untimely manner. Better decisions are made when investors look longer term with a wider view. The three charts shown above are for one and three years’ time. The first two charts used daily data points, the third used weekly points, and the one below is a five year chart using monthly data points. GDP trend lines are also inserted.
Indeed, monthly data points smooth out the trend lines even more than weekly’s do. Here gold looks like it’s falling off a cliff and stock market strength looks to be building a base at this level. It’s also easy to see how average the Dow has performed since the crash. That is, of course, its goal. It looks to indicate the market (a.k.a. GDP).
To be sure, monetary tricks like QE and Operation Twist can alter certain anomalies in the modern global market. But if they actually fixed the market, 16 out of 17 Euro Zone countries wouldn’t be in recession, American growth would be strong, and China wouldn’t be sliding into recession.
To believe that the dynamic for gold has changed is to already have forgotten what was recently proven again in Japan: when currency depreciates the value of gold rises. To relegate gold’s value to dust is then to believe that the global currency market is stable, the global economy is strong, central governments are fiscally responsible, and the stock market is under-valued.
So not the case.
Corrections happen all the time. Monetary shell games don’t fix markets. And currency devaluation isn’t the way to prosperity.
Stay tuned…