In today’s issue:
- Stocks have gone nowhere for 60 years
- Gold measures monetary and fiscal fraud
- The IMF is openly advocating inflation
My old friend James Allen posted an absolute barnstormer of an analysis of gold last week. To sum it up, “gold has returned almost triple the US stock market since 1 January 2000” and “gold has also beaten it over 20 years, from nearer the market bottom after the tech bust.”
“In fact, quite remarkably, if you price the S&P 500 in gold terms rather than dollars, it has gone absolutely nowhere in 60 years, albeit with some wild swings along the way.”
The big question is why?
How can a pet rock, a lump of metal, an inanimate object, defeat the might of the US stock market? A basket of stocks that has itself outperformed its peers around the world…
Figuring out the answer is crucially important for investors. As I expect our founding publisher Dan Denning to explain at the upcoming Gold Summit, it may decide whether you should be invested in gold or stocks today.
The presumption we’re making here is called “mean reversion.” What goes up must come down. And what goes down must come back up.
Investors need to buy low and sell high. So they should own what has underperformed and sell what has outperformed.
My father in-law used this analysis to buy gold in the early 2000s, when it was cheap. It hadn’t gone up for a very long time. And so it wasn’t a surprise when it beat stocks for the subsequent decades.
But if gold is whooping stocks so badly for so long, does that mean you should sell gold and buy stocks today, in anticipation of mean reversion? Does it mean we are entering a period of stocks outperforming gold?
Maybe… but I doubt it. Because the reasons for gold’s outperformance are hardly likely to go away. Well, at least not in a pleasant fashion for stock market investors anyway.
Why gold is trouncing the stock market
We measure inflation by calculating how fast consumer prices are rising. The trouble is, consumer prices are only one small part of the economy’s list of prices.
When the price of property, stocks, bonds, Pokémon cards or gold are soaring, that’s not counted by inflation statistics.
That might sound like an academic distinction. But it’s the flaw that gave us the 2008 financial crisis, the tech bubble and Asian Financial Crisis.
You see, the US Federal Reserve kept interest rates low in the buildup to 2008 because inflation was low. Inflation in consumer prices, that is.
But all the inflation from the Fed’s loose monetary policy was just occurring in the US property market instead. Where it isn’t measured. But where low interest rates encourage it to go because of their link to mortgages.
When the Fed tightened monetary policy, it triggered a crash in inflated property prices. And that gave us the 2008 crisis.
The point being that inflation caused by loose monetary policy can occur in speculative sectors of financial markets. Where it is ignored by monetary policy makers, until it causes a crash.
It occurred in tech stocks in 1999. And Asian stocks in the 90s.
Each time the crash came as a surprise, because the inflation was occurring outside the arbitrary list of prices tracked by the central bankers. The same central bankers inflating those same bubbles with their loose monetary policy.
Well, in the case of the Asian Financial Crisis, it was their currency pegs that caused the loose monetary policy. But that’s just another side of the same coin.
The gold price spent the period of inflation during the 2003-2007 housing bubble surging too. It was a signal that the true force behind soaring house prices was just inflation. After all, gold is a lump of metal. It rises because of inflation.
The gold price was signalling trouble ahead back then. That’s what it did before the inflation of 2021 too. And it’s doing it again now…
What gold investors need to ask themselves today is simple:
Will fiscal and monetary policy get more or less bizarre?
Gold is the opt-out asset. It is how investors escape financial markets and money. It’s how you leave the party just before things start to get out of control.
You don’t want to own gold when the economy is improving. Or when the government is about to commit to sensible policy. Or when the central bank has committed to bringing inflation back under control, permanently.
The only time that’s happened is the 80s. And that’s the last time stocks outperformed gold for a long period of time too. They outpaced inflation comfortably.
Back then, hawkish monetary policy and free-market economic policy came back into vogue with the likes of Reagan, Thatcher and Volcker.
Do you see that happening again anytime soon?
The US government is running a war time fiscal deficit to keep the economy on life support.
The French government’s bond yield is closing in on Greece’s.
Japan’s demographic and debt problem is becoming absurd, with inflation and a crashing currency signalling the point of reckoning is drawing near.
Central banks are cutting rates with inflation still above their targets.
No politician is taking their deficit and debt seriously.
The IMF is openly recommending governments inflate away their debt, again. They call it a “liquidation tax.” And the value of your savings and investments is what’s getting liquidated.
It seems to me that we are in for plenty more fiscal and monetary chaos in the next ten years.
What’s an investor to do?
James Allen pointed out that stocks have gone nowhere in terms of gold for 60 years. That might sound familiar to regular readers of my work. I’ve often pointed out that, adjusted for inflation, the Dow Jones index went nowhere between 1915 and 1982 – 67 years.
Of course, stocks rose plenty in that time. But it was just inflation. The capital gains tax bill would’ve been mighty painful, by the way.
But the point is that stock market returns are not the guarantee your financial adviser promised you. Stocks don’t just “go up in the long run”. That myth is based on the debasement of the money in which they’re measured.
There are prolonged periods of time when investors would’ve been better off sitting in gold.
Of course, there’s a far better option than opting out of stocks altogether. You can rotate in and out of gold when stocks are cheap and expensive.
As James pointed out, there have been plenty of extraordinary booms and busts in stocks along the way. Gold only outperforms when governments and central banks are fudging the figures.
But how do you measure when to be in gold and when in stocks?
More on precisely that from Dan Denning at the upcoming Gold Summit. Have you registered for it yet?
Until next time,
Nick Hubble
Editor, Fortune & Freedom
