Last week, the gold price finally popped out of a trading range it has been in since August 2020. Technical analysis would suggest it is on the cusp of a rally higher, although this is far from confirmed yet.
Today I want to ponder whether gold’s odd price action can be explained by a simple idea: it is one step ahead of all of us. And, if you buy this idea, let’s consider what gold’s latest price action tells us about the future.
But first, here is some context.
Gold began a new bull market back in 2019. Markets had a rough 2018 and fears that the global economy was struggling began to emerge. Central bankers eventually loosened monetary policy again to avoid this. And anticipating this loosening was what sent gold higher.
The bull run was only briefly interrupted by the pandemic plunge, and gold went on to reach highs in August of 2020, when central bankers were busily spiking the market’s punchbowl with cocaine, having discovered that the usual gin wasn’t doing the trick.
Since then, gold has trended down and then sideways, even as the wild monetary policy continued… even as inflation began… even as central bankers didn’t tighten monetary policy despite inflation…
This has been mighty frustrating for gold investors. Indeed, I view gold’s underperformance as Fortune & Freedom’s biggest disappointment and mistake.
But what explains this?
Gold investors could not have wished for a better environment than that of the last 18 months, it would seem. Deeply negative interest rates, exceptionally loose monetary policy, stagnation in the economy, geopolitical drama, and all sorts of other factors which should support the gold price.
But gold went nowhere. Why?
One possible explanation is that gold is more than the usual one-step-ahead, as financial markets are supposed to be. “Buy the rumour, sell the news,” and all that.
In other words, what if gold foresaw our current news cycle back in 2019 and the beginning of 2020? What if that rally to all-time highs back then was because of what was to come… what is happening now?
No doubt you’re sceptical about that idea. Are financial markets really far-sighted? I mean, aren’t they a bit too volatile for that?
Well, the real world is volatile too. Events that are difficult to foresee do happen, such as pandemics and the failure to bail out a systemically important investment bank after the expectation that it would be bailed out had been created.
And being far-sighted doesn’t mean you correctly anticipate what’s coming, it just means that you react to what you think you see coming in the more or less distant future rather than the present.
The real question is how far ahead markets look, and how often they are right. Consider this from Bloomberg: “Hilton Worldwide has performed virtually identically to Zoom since February 2020, which was the pre-pandemic peak for the overall market.”
The stock market got caught out by the pandemic, of course. Zoom boomed while hotel Hilton busted. But since then, Zoom has trended down and Hilton trundled along higher after an initial crash. The market began to look ahead to a post-pandemic world, even during the height of the pandemic.
Then there’s this video from UnHerd, where Louis-Vincent Gave points out that the stock market seems to have been one step ahead of the vaccine makers when it comes to the efficacy of their “goods”.
The point is that markets price in a future, however (in)accurately. And gold may be particularly far-sighted, however often it is actually right.
Gold surged in 2019 as the economy looked like it might roll over, which meant monetary policy would be loosened soon. It foresaw the deeply negative real interest rates and persistent loose monetary policy of late 2021 back in early 2020, which is why it rallied to highs back then.
Later in 2020 the gold price began to foresee what would happen next. Namely, the current combination of tighter monetary policy and a slowing economy, which is bad for gold.
More recently, that view shifted towards a fear of higher interest rates triggering a debt crisis, or just a recession – again two steps ahead and bad for gold.
In other words, the gold price is always one step ahead of markets, which are in turn one step ahead of events. Gold reflects what is about to become the consensus view next, while other markets reflect what is becoming the consensus view.
Of course, it’s tough to know what’ll happen in the future, let alone whether gold has it right. But if you look back at the past trading behaviour, gold’s performance seems to have been rather prescient, before anything else.
Now, twist this logic on its head and ask yourself the following: presuming the gold price is two steps ahead of us, and that it is right about what happens next, can we figure out what’ll happen next? What’ll markets begin to react to?
Gold’s recent breakout from an 18-month range may be on the cusp of pricing in the central bank reaction to the coming recession and crash. It may be preparing for a return to loose monetary policy, just while other markets are worrying about tighter policy…
Of course, the breakout is but a few days old. But paying attention to gold’s price action, which has been frustrating, could actually give you a good idea of what’s coming next…
Speaking of which, my friend Sam Volkering believes he has identified a shift that is approaching in the crypto market. Just as each adoption of new cohorts of crypto investors has triggered new highs for the crypto market, so too could this potential next phase. Find out what that is, here.
Editor, Fortune & Freedom