Wheat & Gold: The Long Cycle

There is an extremely long term cycle of 42-44 years in the ratio of gold prices to wheat prices, and it is due for a top now.  That word "now" needs to be interpreted extremely loosely, given the long nature of this cycle's period, and its slight imprecision.

Going back to the late 1700, there has been an important top in the ratio of gold to wheat prices every 42-44 years.  The last one of these was in 1980, when the big gold bubble of the late 1970s reached its climax.

For the Gold/Wheat Ratio, a high reading means that wheat is cheap relative to gold.  A low reading means that wheat is expensive.  When we have had wars, or volcanic eruptions like the 1816 "year without a summer", wheat prices have gotten very expensive.  But right now wheat is very cheap, at least in comparison to the high gold prices. 

A big reason why wheat is so comparatively cheap is that humans have gotten really good at growing wheat efficiently.  We no longer use horses or oxen to plow the fields; we have diesel-powered tractors and harvesters that are computer controlled and GPS guided.  We have excellent synthetic fertilizers thanks to the Haber-Bosch process which combines methane (natural gas) with atmospheric nitrogen to make ammonia.  And we have super efficient trucks and barges for hauling the wheat to market.  And rising atmospheric CO2 levels have benefited us by making growing plants of all types much more efficient.

The upward trend in the Gold/Wheat Ratio matches the upward trend in crop yields.

But none of those technology advancements explains why we see a peak in that Gold/Wheat Ratio every 42-44 years, and with such relatively precise regularity. 

When we look at the ratio of two items priced in dollars, the value of the dollar gets factored out.  So even though inflation has cut the value of the dollar in a big way, especially since the U.S. went off the gold standard, it is not a factor in this ratio.  What matters instead is how we humans value the comparative utility of eating bread versus owning a shiny metal.

Gold has more than doubled since its 2015 price bottom.  Much of that rise is said to be attributed to nations and central banks like Russia and China buying gold bullion to add to their reserves.  Those decisions are the result of humans valuing gold more than they used to, and it represents a big change from the gold selloff of 1999-2001 when the Bank of England decided they did not need to hold large gold reserves any more.  That drove down gold prices to $260/ounce.  I bet the honchos at the Bank of England regret that decision with gold prices now 10x higher. 

At some point, central banks will decide that they have accumulated enough gold, and so that demand factor will go away.  The 42-44 year cycle in the Gold/Wheat Ratio suggests that we are at that point now, assuming that this cycle works again now like it has worked over the last 200+ years.  But note that this is a really long term trend I am writing about, not something which can be "traded" for the short term.