Gold vs. the Sons of Harvey and Erb

Here comes the 'Gold Bubble' callers. Again...

LET's review one of several "gold bubble" headlines that have appeared recently, writes Gary Tanashian in his Notes from the Rabbit Hole.

If you are not familiar with me, rest assured I have been down this path of rebuking "gold bubble" theorists before. As far back as 2007 in fact.

One of my favorite sports has become debunking academics Harvey & Erb again, for their views tying gold to inflation, as if that is the only consideration.

In this piece, the analyst in question and his bubbly views are behind a paywall. But a writer at Investing.com highlights the analyst's views publicly...

"Gold may be in a bubble set to burst, economist warns

"Gold's record-breaking rally could soon unravel, according to John Higgins, Chief Markets Economist at Capital Economics, who warned that the metal's price has surged far beyond its 'fair' value and may now be in bubble territory."

Gold was sorely in need of a correction. The correction may not yet be over. But what is this "fair value" you speak of, sir?

"At the start of 2025, the price of gold was already close to its prior peak in real terms, which it had reached in 1980.

"But now, the real price of gold is nearly 60% higher than that peak, and more than three times its average since 1980."

While gold's long-term role as a store of value is undisputed, Higgins said the latest surge can't be justified by conventional drivers such as lower real bond yields or high inflation.

"Since gold pays no interest, the opportunity cost of holding it declines when the yields of such bonds fall. But those yields have generally been rising...[meaning that the once-tight relationship between Treasury Inflation-Protected Securities (TIPS) yields and gold prices] has broken down in recent years."

He's actually channeling Harvey & Erb, creating a rule that gold must remain in relation to traditional bond market signals about inflation or lack thereof. It is conventional analysis that assumes what was (a disinflationary downtrend in long-term yields until 2022) still will be. It isn't and it won't.

Those yields broke out to the upside in 2022 and broke a continuum of disinflationary bond market signaling from the 1980s. However, we have been projecting yields to ease since 2023, and through 2025, at least. An interim disinflationary phase, possibly to be capped off by a liquidity crisis of some kind.

Even assuming that the macro did not change profoundly in 2022 (though it did), gold is and has been about more than just aping inflation anxieties and bond market signals like TIPs yields. Just ask the still-plucky Harvey & Erb how satisfying it has been to hump a view of the "real" price of gold as measured by inflation signals decade after decade.

As of May, 2024, our trusty academics were still at it, drawing the following conclusion:

Guys, the main dilemma is that the mainstream discourse is managed by intellectuals, academics and robots who value their ill-conceived opinions over reality, even when hit over the head with proof, again and again.

Anyone reading and reacting to that academic paper just missed a doubling of the gold price since it was written. Which brings us right back to our faithful bubble callers. For them, I have a chart. Ladies and gentlemen, meet your gold bubble.

This longer-term chart, flipped over to the SPX/Gold ratio, shows us the grisly possibilities for the stock market in relation to gold.

Again, remember here that the macro changed profoundly in 2022, from disinflationary to inflationary on the major trend in bond market signaling. Is it a coincidence that this chart hearkens the 1970s (when stocks held up nominally, but crashed in gold terms)?

This not just some chart guy presenting charts that make his point. The macro changed in 2022 and there was a reason for it: Debt.

Analysts blindly extrapolating data from previous decades blindly accept that debt is used to literally run the economy. But by all means dear academics and conventional economists, keep your heads back in the pre-2022 macro, when debt was manageable and conductive to nice, neat, conventional analysis.

Given a massive and growing debt edifice, the no-longer reliable bond market as the indicator it was from 1980 to 2022, and the faulty practice of viewing gold through those lenses, you ain't seen nothin' yet, in my opinion, where the price of gold is concerned.

Those listening to the "experts" already missed a move from $2000 to $4000. They'll probably listen again as the bears come out at the first sign of a (much needed) gold correction. Those experts will look like the geniuses they fancy themselves to be during the correction.

After that? Well, you know the story. The Gold/SPX chart above advises that unless the world is ending (with stocks taking an epic crash), gold will be going much higher in a new macro very unlike the one that ended in 2022.

As for the bubble callers?

"The warning comes as gold trades near record highs, buoyed by geopolitical tensions, persistent central bank buying, and a wave of retail enthusiasm.

"Yet, as Higgins' analysis suggests, the market's exuberance may have detached from economic reality − raising the risk that the next major move could be downward."

Man, when any dyed in the wool contrarian saw the public lining up for bullion, they would have prepared for some gold price damage. From NFTRH 885:

"I am not the biggest proponent of candlestick analysis [a negative short-term gold price view, presented previously in the segment] because that is what day traders look at. I try to keep my view longer than hours or 3 days. But in this case it is notable as gold is wildly overbought and well, there are those pictures of the public lining up at gold dealers to get their piece of the action."

The public could not take it anymore and began to FOMO for bullion in Australia and other countries. Not a good sign, contrary-wise, for the current extended price of the monetary metal. Bigger picture, gold is in a sweet spot, as confidence declines within the new macro.

Now, with the sons of Harvey & Erb out to tend the herds in their expert manner, all the pieces are coming together again for the experts to be wrong. Again.