The Last Five Times This Happened, Gold Outperformed Stocks by 20%

The Last Five Times This Happened, Gold Outperformed Stocks by 20 Percent
Golden pegasus statue on the Alexander III bridge over the Seine, in Paris. Photo by Jeremy Bezanger

From Birch Gold Group

This week, Your News to Know rounds up the latest top stories involving gold and the overall economy. Stories include: Bloomberg and Goldman Sachs think gold could outperform the S&P 500 by 20%, a Friedman perspective on central banks’ inflation talks , and gold soars when inflation startles investors.

Analysts thinks gold could beat the S&P 500 (again)

As seen on Zero Hedge, after so much rotation among asset classes, investors might be taking a look at one asset that should have never went off their radar. Bloomberg recently opined that gold could beat the S&P 500 Index, as it habitually does, by 20% as stagflation can no longer be ignored.

The article notes that economic growth seems to be peaking around the time when high inflation is only starting to gain traction. One of the primary correlations is gold’s inverse relationship with real yields on Treasuries, the latter having sunk to all-time lows as of late. This has flared up gold’s 20-week moving averages and signals that a prolonged breakout could be in the works next year.

The signal is the sixth instance, still ongoing, of gold’s 20-week moving average crossing bandwidth below 6 in the last two decades. Each of the five instances resulted in gold outperforming the S&P 500 Index by an average of 19% over the following year.

While several analysts have upgraded their gold forecasts in line with cautious sentiment and inflation awareness, Goldman’s are among the more bullish ones.

The bank’s head of energy research Damien Courvalin said that gold is set to move far past its current price, bolstering previous calls for clients to consider the metal’s upside. Goldman set a -1.10% target for 30-year real yields which, if met, will bring gold to $2,300 territory. The metal should also benefit from relatively low weighing among investors right now, along with volatility still lingering close to 2-year lows.

Milton Friedman wouldn’t have bought temporary inflation, and neither should you

From the Federal Reserve to the European Central Bank, officials have done nothing but downplay the impact of an unprecedented expansion in the money supply. According to them, any spikes in inflation are, and will be, so brief that they might as well be ignored. But this has already proven untrue, and the most accurate inflation models tell us that inflation is yet to truly materialize.

Renowned economist Milton Friedman asserted that inflation is the result of a simple supply and demand dynamic, appearing when too much money is being printed and dumped into the economy. All other factors, from wages to prices, are a byproduct of inflation, not a cause.

The three stretches where consumer prices spiked above 10% annually, far and above the intended 2% rate, were precipitated by two instances of the money supply rising by nearly 14%. This monetary expansion started in the 1970s and the toxic combination of low growth and high inflation we call stagflation persisted until the early 1980s.

Last February, the monetary expansion hit 27.1%, and still lingers around 13%, a rate double that of 2019 and earlier, as well as double the long-term average for the 50-year period. (To put this into perspective, about 40% of the dollars in the world were printed in the last 18 months.) Déjà vu all over again?

It seems likely. In their Wall Street Journal piece, John Greenwood and Steve Hanke noted that asset-price inflation happens with a 1-9 month lag, economic activity picks up within 6-18 months, and only after 12-24 months does the generalized inflation kick in.

This suggests that inflation, along with the consequent gains in gold, won’t peak until Q1 2022. From there, both should soar until at least the middle of the year. Of course, this isn’t accounting for any subsequent monetary pumps, or a Federal Reserve tightening cycle that seems increasingly likely to never happen.

Have the markets finally come to terms with inflation sticking around?

Gold’s price action last week tells a tale of realistic inflation worries mixed with what looks to be some fairly unrealistic optimism. After a lengthy period of inaction, the metal spiked to $1,866 on Wednesday and finished the week lower at $1,845.

It did so even as the U.S. dollar climbed to its highest level since last July, riding on some better-than-expected data in the U.S. Considering that a strong dollar has always acted as gold’s biggest headwind, we see just how prevalent concerns over inflation are right now. And not without reason.

Besides the tripling of the Federal Reserve’s inflation target, Britain has also seen inflation hit a 10-year high, and Canada’s annual rate matched a February 2003 high this October. Even the Euro zone is seeing inflation twice as high as its 2% target. Meanwhile, we’ve seen silver, platinum and palladium all post smaller gains alongside gold’s. Experienced precious metals investors shouldn’t be too surprised by this divergence. After all, both platinum and palladium are primarily industrial metals and tend to move more like industrial commodities. In other words, bad economic news can drive their prices down. Silver’s demand base is nearly evenly split between industrial and investment buyers, so bad economic news might push silver’s price up or down.

David Meger, director of metals trading at High Ridge Futures, reiterated where our attention should be focused: “The underlying support for gold and silver remains the inflationary pressures we continue to see in the market,” he said.

A hawkish Fed sentiment may perhaps the main threat to prices, but, with Jerome Powell’s reappointment, that simply doesn’t seem to be in the cards. Kinesis Money’s Carlo Alberto De Casa thinks the next major benchmark for gold’s price is $1,875. He sees that as a launching pad to the next big leg up. Once again, only rate hikes stand in gold’s way.

So far, though, Fed-related pressures have mostly come in the form of markets anticipating hawkish plans or demonstrating naive optimism. It’s still a point of contention if, or how, the Fed can raise interest rates at all, or apply any sort of significant tightening. The tools may exist but the political will to use them seems as dead as Paul Volcker or fiscal restraint.

2021, gold as investment, gold price, stagflation