• 546 days Will The ECB Continue To Hike Rates?
  • 546 days Forbes: Aramco Remains Largest Company In The Middle East
  • 548 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 948 days Could Crypto Overtake Traditional Investment?
  • 952 days Americans Still Quitting Jobs At Record Pace
  • 954 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 957 days Is The Dollar Too Strong?
  • 958 days Big Tech Disappoints Investors on Earnings Calls
  • 959 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 960 days China Is Quietly Trying To Distance Itself From Russia
  • 961 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 965 days Crypto Investors Won Big In 2021
  • 965 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 966 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 968 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 968 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 972 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 972 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 972 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 975 days Are NFTs About To Take Over Gaming?
  1. Home
  2. Markets
  3. Other

A Weak Economy Remains Gold's Best Friend

It was Bob Prechter of Elliott Wave fame, likely among others who noted that correlations between all asset classes are quite strong during a Depression. This is true in a cyclical sense but not in a structural sense. Stocks tumbled in the 1929-1941 period while commodities, led by Gold and gold producers, increased in value. We've experienced similar phenomena in the past 12 years. Cyclically, there has been a correlation between these asset classes. Structurally, stocks have been in a bear market and resource sector has been in a bull market. The driving force has been a weak economy and bear market which usually leads to more inflationary policy, which in turn benefits the resource sector. Are we soon to see a replay of this scenario?

Despite unprecedented monetary inflation, stimulus and bailouts, the economy has barely recovered. The chart below (from Doug Short) displays post-war real gdp growth. The black line shows the 10-year average which has been in a steep decline since 2006. At the time, the Bush II recovery was the weakest on record. It has been surpassed by a pathetically weak recovery (statistically) under Obama. The growth rate in each of the past seven quarters has been below the the 10-year moving average.

Real Gross Domestic Product

Meanwhile, economic data as a whole is okay but is currently failing to meet expectations. The Citigroup Economic Surprise Index, (economic data relative to expectations) has gone negative for the US, and the rest of the world is not far behind. Clearly, continued disappointing economic data combined with any weakness in equities would prompt more Fed action. Judging from what happened in 2010 and 2011, it is a near certainty.

Citigroup Economic Surprise Indices
Larger Image

It is important to note the current position of the markets in contrast to a year ago. Currently, precious metals are bottoming while equities are nearing multi-year resistance. This decoupling, shown in the chart below, began in the aftermath of the mini-Euro crisis.

$SPX (S&P 500 Large Cap Index) INDX

Other than 2001-2002, we haven't seen an extended period of decoupling between precious metals and equities. However, that doesn't preclude the possibility in the coming years. In fact, there are two cases of a decoupling during the 1970s. In the chart below we graph the S&P 500 (blue) and the Barron's Gold Mining Index (red, and scale numbers adjusted).

S&P 500 vs Barron's Gold Mining Index (BGMI)

The period from 1971-1972 bears quite a bit of resemblance to 2011-2012. The S&P 500 (blue) continued to make new highs while the gold stocks (red) remained in a long-term consolidation that included two corrections. However, decoupling would soon benefit the gold stocks as they rose more than 4-fold in less than 18 months. Oh and during that period, the S&P entered one of its worst bear markets on record. Finally, note that the next major bottom in the gold stocks in 1976, coincided with a top in the S&P 500.

The current decoupling of precious metals and equities combined with an unsustainable recovery provides insight into the future. With equities nearing major resistance and precious metals emerging from an important low, it is obvious which asset class is in position to benefit from disappointing economic data and which asset class could enter a mild cyclical bear market. Equities have already experienced two nasty bear markets and two recessions. Though still in a secular bear, the likely outcome of the next few years is far more likely to be something on the order of the late 1970s and not the mid 1970s.

The combination of the failure of equities to make new highs and continued disappointing economic data would likely serve as a catalyst to ignite the precious metals sector while equities could enter a situation similar to the late 1970s. The potential struggle of equities combined with a resurgence in precious metals will ultimately attract the hot money inflows that we have not seen since 2006-2007.

Good Luck!

 


If you are a serious investor and you'd be interested in profiting from this development from 2012-2014, then we invite you to learn more about our professional service.

 

Back to homepage

Leave a comment

Leave a comment