Dear Professor Lewis,

Your backwardation comments in November were correct, prescient and ahead of the chorus of backwardation articles that followed (by such luminaries as Fekete, Sinclair, etc.)

I would be greatly interested in your thoughts on where gold will go in the first quarter of 2009, particularly given its recent run-up to $880, then retreat back to $830 for support.

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Best regards,
Minyan George

Dear Minyan George,

First, thank you for the kind words.

Second: 2009 should be a good year for gold, in my humble opinion.

Given the Fed’s titanic inflationary efforts, I suspect all asset classes are going to rally (in terms of dollars) in January. But that will just be a bear-market rally for stocks (especially when adjusted for inflation).

At the same time, because of its monetary properties, gold (and gold mining stocks) should outperform the broader market by a wide margin. This jibes with the SPX/gold ratio chart below, which is once again toying with falling below 1 (indicating that gold is about to rise above the S&P in terms of price, which is a major shift, one not seen since 1973).

For example, let’s say the S&Ps manage a bear market rally back to 1000 in January (a move of about 12 percent), we should expect to see gold trade up well over 1000.

The SPX might therefore rally in nominal terms, but when deonominated in gold, it will continue to collapse in real terms, just as it has consistently since its inflation-adjusted peak in 2000.


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The very fact that gold was the only other asset -- besides US Treasuries -- positive on the year in terms of dollars in 2008 is already getting people’s attention; that proof of gold’s “money-ness” will benefit it in 2009, as well.

As for the gold miners, they were giant disappointments in 2008 since they were treated by the market as “just another stock” - despite gold being up on the year, and despite the miners’ costs having collapsed due to the decline in the price of oil. The market sometimes overreacts in the short term (both to the upside and the downside), and I believe we’ve seen such an overreaction in the gold stocks in 2008, too.

Regardless of what the economy is like, or what the rest of the stock market is doing in 2009, if gold miners are earning more and more dollars (which they will be next year, especially in light of their dollar-denominated costs collapsing in the latter half of 2008), people will bid them up in dollars. In fact, I would argue that gold miners may be one of the only equity groups that will actually see positive earnings growth next year, and that should actually earn them premium valuations too.

We’re even already seeing a taste of this “standalone performance” in December, given that Royal Gold (RGLD), a gold royalty company, has been one of a small handful of stocks to make a new all-time high over the past couple weeks.


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With the dollar squeeze having ended, the Fed cranking up the printing presses, and the financial markets beginning to reliquify once again, the turn of the year could even kick off a precipitous decline in the dollar and a meltup in gold and gold stocks.


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The fact that the Fed announced yesterday that it would begin monetizing MBS in early January may just provide the “catalyst” for that acceleration too.