Issue link: http://resourceworld.uberflip.com/i/1239546
A P R I L / M A Y 2 0 2 0 www.resourceworld.com 7 An example of a short cycle commodity is the price of gasoline. We've all watched in wonder and muttered under our breath as the price of gasoline seems to magically rise every spring ahead of the summer driving season, only to drift lower once again as fall approaches. And even though the whole petroleum industry, from producers to refiners, knows there is an annual rise in demand for gasoline, it cannot seem to produce and store enough gasoline ahead of time to offset this increased demand – leaving consumers to pay more for the privilege of driving in the summer months. Now this is a very simplistic example to make a point, and to be fair to the petroleum industry, there are other factors involved in the pricing of gasoline such as the additional cost of refining cleaner burning summer gasoline that come into play. But the overall synopsis is correct in that gasoline prices seem to go up every spring. A similar short term example is the price of natural gas rising sharply ahead of an anticipated period of cold weather and falling just as quickly once the cold snap passes. As we've previously experienced, the price of gold often reacts violently to short term issues such as unexpected changes to US Fed key interest rates. So, in a short term reactionary situation, the price of gold could be either underpriced or overpriced. In the recent Coronavirus/crude oil induced run-up to US $1,717, I would suggest that the price of gold was probably overpriced. Now let's take a look at the price of gold over a longer term or economic cycle from early 2016 to the end of 2019. I pick this time frame as many commodities, including gold, bottomed in early 2016 and tended to rise over this period. A commodity that closely follows the economic cycle is copper. Copper is used in so many products that it is often referred to as having a PhD in economics. In the past four years the price of copper rose from about US $2/lb to US $2.80 for a gain of some 40%. Another commodity that tends to follow the economic cycle is crude oil. Although hated by environmentalists, crude oil still powers the world's economies. In the same four-year cycle, the price of crude oil rose from about US $50/bbl to about US $63 for a gain of about 36%. In comparison, in the same time frame, the price of gold bullion rose by about US $400, from about US $1,100 to about US $1,500, for a gain of about 36%. Again, commodity prices can move violently short-term, but this longer time reference tends to smooth out some of that volatility. Based on this longer term economic cycle it would seem that gold bullion is neither undervalued nor overval - ued, but relatively fairly valued in that the percentage gain of the yellow metal was in line with the gains of two commodities that closely reflect that cycle. Let's now change course (and make the gold bugs happy) and take a look at gold as a currency. Go back further to a time that most remember well – the global financial crisis of 2008 – which by most accounts was the greatest financial col - lapse since the Great Depression of the early 1930s. The 2008 financial crisis was widespread and affected most every asset from banking to housing to securities, and was the last time that gold bullion was considered more of a currency than a commodity. The big difference of the two great financial crises was not the collapse itself, but the recovery from such. Back in the 1930s most central governments let the economic cycle work itself out which, looking back, resulted in the long depres - sion and suffering that followed. Fast forward to 2008 and central governments, not looking to repeat the mis- takes of the past, flooded the money markets with funds and lowered interest rates to stimulate the economy into a swifter recovery. This injection of money was best GOLD