Will precious metals be the next asset class to pop?

While economies of the world continue to reel with periodic lockdowns and increased restrictions on business activity such as international tourism and international education, stock market indices continue to break new records. As seen in the S&P 500 chart below, the boom/bust cycle of the 90s and 2000s has been replaced by a raging bull on steroids post GFC. What makes the current market so difficult to fathom, is that the broader economy is in recession if not depression as indicated by the grey zones in the chart.

Source: Macrotrends.net, Non-log scale, Non inflation-adjusted

These gains may be a function of a globe awash with increased M2 money supply. Here are two charts from the US Fed and the Reserve Bank of Australia. They show the change in overall money supply in the US and Australia respectively. 

Both charts show a huge post pandemic parabolic bump vanishing into the top right. If the two charts above were tracking the supply of a cryptocurrency controlled by a core team of developers, you’d be looking for a safe haven. As supply grows, eventually the ranks of the buyers thin out. 

As the increase in total monetary supply has increased, commodities have made major moves to the up side. Iron ore is having a correction, but is still up 36% in the last year rising from US$121.7 on 3 August 2020 to US$191.5 a year later.

Crude Oil has seen a similar run, now sitting at US$70 after bouncing off it’s “coming to Jesus” moment in 2020 when the price went negative briefly. Natural Gas is up better than 60% YTD and copper is up 25% over the same time frame even after a correction. 

In Australia, house prices jumped 5.4% in the March Quarter alone (see the chart below). This comes after a solid 3% gain in the previous quarter. If we stay on this pace it will be well over 15% on the year, and that’s not due to any major innovations in the houses themselves or the land they stand on.

So we can see that shares, commodities and real estate have all been significant beneficiaries of increasingly loose monetary policy. Their limited nature has led to a bidding up of limited resources. Gold and silver are of a limited supply, more so than any of the above. Gold and silver however are not widely understood as something easily bought by mum and dad investors or in the physical form by managed funds. The latter use ETF’s and last year saw record flows into these synthetic bullion plays. However that waned as everyone ‘bought the CoolAid’ and piled into shares. The last few weeks have seen increasingly concerning H2 US economic indicators from poor ISM prints to last nights shocking employment data.  This will only increase the supply of near free money as the Fed and government fight to keep the bubble inflated. As this happens history would indicate a lot of those funds in the aforementioned assets will look to capital preservation over yield. Last night gold spiked nearly $20 on that weak ADP jobs data along with bonds.  But then, immediately afterwards Fed Vice Chair Richard Clarida gave a quite ‘hawkish’ speech (tightening rather than ‘dovish’ easing) and both fully corrected almost to where they started.  Gold finished slightly higher on the session but it highlights how quickly the market will move to precious metals when the ‘goldilocks’ economy weakens amid record debt, record stimulus, and the return or continuation of COVID economic impacts. That shares fell on even that hint of tapering again tells you what will happen if they actually did.  Clarida expects tapering as early as December.

This week we have written twice about this current mid bull correction gold has been grinding out of since it bottomed in March. Gold is still 12% beneath last year’s all time highs and silver yet to stretch back to 2011 highs. The big question is whether precious metals will be the next asset class to boom. Last night gave you a hint.