I consider the gold/GYX ratio (the price of gold relative
to the price of a basket of industrial metals) to be the ultimate boom-bust
indicator. With monotonous regularity, the gold price trends downward
relative to the prices of industrial metals during the boom periods and
upward relative to the prices of industrial metals during the ensuing busts.
Not surprisingly, given economic reality, in addition to being an excellent boom-bust
indicator the relative performances of gold and the industrial metals is also
an excellent indicator of general (societal) time preference.
Time preference is the value placed on consumption in the
present relative to future consumption. In particular, rising time preference
involves an increase in the desire to buy consumer goods in the present and,
by extension, a decrease in the desire to save or make long-term investments,
while falling time preference involves a growing desire to put-off current
consumption in order to save or make long-term investments. As an aside,
interest rates naturally stem from time preference in that all else being
equal - which it often isn't - people will prefer getting an item now to
getting the same item at some future time. For example, even if there is no
credit risk, a dollar in the hand today will always have a higher value than
the promise of a dollar in the future. The greater perceived value of the
present good relative to the future good can be expressed as an interest
rate.
Major trends in time preference go hand-in-hand with the
boom-bust cycle. During booms fueled by monetary inflation people temporarily
feel richer and spend more freely, largely because debt is cheap and easy to
come by. This means that booms are accompanied by rising time preference (a
greater eagerness to consume). During the ensuing busts, the mistakes and
recklessness of the preceding boom come to light. There is a general
"pulling in of horns" as the focus turns to the repairing of balance
sheets and the building-up of cash reserves. This means that busts are
accompanied by falling time preference (a greater desire to save).
Gold is no longer money, in that it is no longer commonly
used as a medium of exchange. However, it is widely viewed as a safe and
liquid financial asset, rather than a commodity to be consumed. This causes
it to perform similarly, relative to other metals, to how it would perform if
it were money. In particular, during a period when there's a general increase
in the desire to immediately consume and a concomitant reduction in the
desire to hold cash in reserve (a period of rising time preference), the gold
price will trend downward relative to the prices of most other metals. And
during a period when there's a general increase in the desire to hold cash in
reserve (a period of falling time preference), the gold price will trend
upward relative to the prices of most other metals.
In other words, periods of rising time preference are
indicated by rising trends in the GYX/gold ratio and periods of falling time
preference are indicated by falling trends in the GYX/gold ratio.
On the following chart of the GYX/gold ratio, the periods
when the ratio was in a rising trend are shaded in yellow. If you think back
to what was happening during these periods you should (hopefully) realise
that they were, indeed, periods when societal time preference was rising.
Recall how caution was 'thrown to the wind' during the NASDAQ bubble of
1999-2000, the real-estate bubble of 2003-2006, the emerging-markets and
commodity bubbles of 2009-2010, and the QE-promoted debt bubbles of
2013-2014.
Also, if you think back to what was happening during the
unshaded parts of the chart you should realise that these were periods when
societal time preference was falling - when investments were revealed as
ill-conceived, debts were revealed as unsupportable, and people throughout
the economy were collectively spending less in an effort to save more.
![24hGold - Another way to look...](http://www.24hgold.com/24hpmdata/articles/img/Steve%20Saville-Another%20way%20to%20look%20at%20the%20ultimate%20boom-bust%20indicator-2016-01-15-001.gif) ![](../style/all/img/bouton/Zoom_in_6.png)
The most recent downturn in societal time preference
appears to have been set in motion by the bursting of the shale-oil
investment bubble. Many people (not including me) thought that the large
decline in the oil price would turn out to be a major plus for the US
economy. Just like a tax cut, they claimed. It was actually a negative,
though, because substantial debt-funded investments had been predicated on
the oil price remaining high.
As to how long the current trend will continue, a lot
will depend on whether or not the stock market's cyclical bullish trend is
over. If it is over, which it probably is, then the GYX/gold ratio will
continue to fall for at least another 12 months.
The final point I'll make is that in a free economy that
didn't have a central bank, trends in societal time preference would tend to
be more gradual and neither a rising nor a falling time preference would be a
problem to be reckoned with. Instead, trends in time preference would
influence interest rates throughout the economy in such a way as to provide
valid and useful signals to businesses and investors.
http://tsi-blog.com/
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