by Rob Kirby
August 10, 2006

Ibbotson Associates of Chicago were contracted by Bullion Management Services Inc. of Toronto to prepare a comprehensive study regarding the effects of portfolio diversification with Gold, Silver and Platinum Bullion.

Their findings were published in June 2005 and concentrated on the period between 1971, when the price of gold was �allowed to float� with President Nixon�s abrogation of the Bretton Woods System and the present [2005].

The �net result� of this study, utilizing back-testing, was the conclusion that �all� portfolios, whether of a conservative, moderate or aggressive risk appetite � benefited from the inclusion of basket of the three above named metals in the percentages of 7.1 %, 12.5 % and 15.7 % respectively. I've written about this before.

The science behind the findings mentioned above largely rest in the fact that precious metals returns are, historically, negatively correlated to those of equities and the only known asset class that is positively correlated with inflation. Simplified, the reasoning goes as follows: as equity prices fall � precious metals prices rise so as to offset the negative contribution to equity�s contribution to total return. The reverse1, one might assume, occurs when equities rise in value.

The Hidden Nugget In The Report

As a �gold bug� and a believer that the price of gold [and silver] has been nefariously �rigged� by monetary elites, the Ibbotson Report and its findings was naturally of particular interest to me. With much of my own proprietary research aimed at irrefutably proving the notion that the price of gold has been rigged; my initial thoughts of a scholarly report like Ibbotson were that it would serve as a �smoking gun� � settling once and for all � that metals prices have indeed been surreptitiously rigged.

But there was no smoking gun, or so it appeared at first blush.

With the passage of time and after re-reading the report, I can now say that I can not only smell smoke, I can see it too � to cite a clich� - my problem all along was that I was looking in the wrong place.

The nugget that I'm speaking of, available right at the top of the executive summary is;

So what exactly does this mean?

The answer is quite simple.

Empirically, bond returns [or market interest rates] �used to be� negatively correlated to equity returns but, as Ibbotson duly noted, this long held relationship has largely broken down in recent years. Let's remember that market interest rates are historically �set� at a �spread-over� inflation.

Interestingly, no credible explanation for this long held relationship �break down� is offered in the Ibbotson Report.

I wonder if there's a reason why Ibbotson didn't want to or simply would not go there?

But Everything Happens For A Reason � Doesn�t It?

I now turn your attention to the work John Williams of Shadow Government Statistics. Williams provides us with �the missing reason� why this long held relationship [equity returns being negatively correlated with interest rates] has broken down. The real reason rests in changes in how inflation, and thus market interest rates, is computed;

Take particular note of the timeframes involved; distorted inflation reporting became an �issue� � according to Williams � at the precise mid point in time that Ibbotson noticed,

Remarkably, but perhaps not surprisingly, it was in the immediate aftermath of the early 1990's timeframe cited by Williams, that GATA claims that gold price suppression � under the cover of Robert Rubin's Strong Dollar Policy � began in earnest. Isn�t it completely amazing how coincidences like this continue to compound one upon another?

Williams then goes on to explain, errant CPI reporting then lends itself to faulty GDP reporting, citing;

Does anyone want to wager a small amount [like a gold eagle, perhaps?] as to whether improper CPI and resulting GDP reporting might have led to a little bit of �irrational exuberance�?

Does any of this sound remotely familiar?

Consider that Ibbotson is clear in their findings that, for the period studied; precious metals provided a substantial hedge against inflation. We know factually that gold is widely viewed as competition for, or, the anti-dollar. The recent action of a good many Central Banks lends a whole lot of credence to this fact � doesn't it?

Now, take a good look in the mirror and try to convince the person looking back that their personal rate of inflation is really running around 2 � 3 % as officialdom would have us believe. Now ask yourself again if the price of gold is rigged?

© 2006 Rob Kirby
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Rob Kirby
Kirby Analytics

Toronto, Ontario, Canada

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