Gold Achieves Massive Breakout Versus Cost of Living

“Money is gold, nothing else.” J.P. Morgan

Arguably, it is more important for gold to go up relative to inflation rather than just obtaining a higher dollar price. After all, that is what raises your real standard of living.  Just getting a higher dollar price, may, or may not do that.  If X investment goes up 10%, but inflation goes up 15%, you are behind 5%. Or, if X goes up 10% and inflation is 10%, you pay a capital gain tax on really a fictitious gain. You must do better than inflation to gain real value, or fall much slower if there is deflation.

gold chart

Think in terms of doing better than the price level, rather than gaining simply in dollars. With this in mind, we have a long-term chart to discuss and its implications.

Above is a chart of the gold price in relative terms with price inflation.  Price inflation here is defined as core inflation, that is the price index adjusted for rapidly changing items like food and fuel.

We start with the left-hand edge, the peak in gold in 1980.  For almost 20 years, the gold price fell both in dollar terms and relative to inflation.  In short, the gold price could not rise consistently above the cost of living.

As an aside, in previous blogs (see April 13th), we explained that those that argue that fiscal deficits drive both inflation and therefore the gold price have a hard time with this time period because deficits continued to rise during this 20-year period, and so did inflation, but the gold price did not.  As we demonstrated, it is really not the fiscal deficit per se that drives the gold price.  It is when fiscal deficits as a percentage of GDP are rising, that is what drives the gold price.

We expect that ratio to move from around fiscal debt being about 4.5% of GDP to probably above 15% or more. It will likely be the biggest swing since the financing of World War II.  This is all because of the extreme “shut down” of the economy in reaction to the CCP virus.

From about 2000 to 2012, gold rose faster than inflation once again, but after 2012 gold could not rise in price as fast as inflation. But starting about 2 years ago, gold began to advance faster than inflation once again.  This was because debt was rising faster than output or GDP.

Using long term exponential moving averages (the 20 and 50 week), we can see that momentum has now shifted to the upside and the moving averages have crossed, giving a moving average buy signal (see red circle).  This suggests gold will outperform inflation for some time to come.

What is also evident in the relationship, is that it takes what chartists call a continuation pattern in the form of an enormous cup and handle formation.  You see the big rounded bottom (the cup) and the “handle” on the extreme right.  Inside the handle, there were several years of sideways action, but we now have broken out of the handle (see green line).

Now it is true, that different chartists use different rules when projecting prices when breaking out of a cup and handle, but given the size of this formation, all methods we are aware of suggest much higher gold prices relative to inflation.

Remember, this is not projecting a dollar price of gold, rather gold’s relationship to inflation levels.

If you understand this formation, one is immediately struck by its immense size.  This thing has been forming a rounding bottom over the past 40 years, and we are now breaking out of the handle.  This implies an enormous advance in the gold price versus inflation.

Once again, this is not a gold to dollar price chart, but gold relative to the purchasing power of money. It either means gold is going to go up much faster than inflation, or it could mean gold will hold its value in relative terms if we have collapsing prices or deflation.

You might think that the dollar price of gold would be the same as gold in inflation terms.  But as the chart below shows, that is not always so. The red line is the conventional dollar price of gold.  The black line is gold in terms of the cost of living index.

gold chart

At the end of the day, you want higher dollar prices to be sure, but you want something to hold its value over time and even gain value over the cost of living.  Gold provides both.

You want something that offers protection in both inflation and deflation environments, and something that does not have default risk.

Most of us are trained to think in terms of the dollar price of things, but ultimately, we want to hold or gain, real value, above and beyond the rate of inflation.

That is exactly what this chart formation suggests gold will be doing, and in a very big way!

Charts courtesy of  All information is derived from sources believed reliable but investment results cannot be guaranteed.

Neland D. Nobel, is a retired portfolio manager and Certified Financial Planner with 45 years of market experience in the securities and gold industry.