‘In Gold We Trust’ Preview – Gold v Shares

This is our second preview of the upcoming ‘In Gold We Trust’ report by Incrementum .  The report is arguably the pre-eminent annual report on gold and silver, read by over 2m people in 2020.  On Monday we gave the context of this epic setup for precious metals and today we look specifically at gold and how it has performed and why.

As we have written extensively over the last couple of weeks, the big news for gold right now is rising yields in bonds …

…and that playing out in less negative real yields as the inflation genie stays in its lantern…. for now.

And whilst we have seen this weakness in gold since August last year, when zooming out we can see the trend is still bullish whether you consider the bottom being 2009 with a bull trap in 2015, or late 2015 as the start of this secular bull market.  The chart below shows this is the case against a host of currencies but particularly those with the most aggressive central banks headed of course by Japan.  In Aussie dollar terms we’d be sitting at around 180 on that scale as our dollar bucked the trend and stayed relatively strong given the RBA was late to the interest rate cutting party.  Of course now we have our central bank joining a select few (including Japan) employing Yield Curve Control which as we discussed here doesn’t necessarily have the ‘limits’ in place of QE.  Aussie printers go brrrrrr

Few would have predicted the truly epic sharemarket rally in the US after the GFC.  That was because no one had lived through QE and know how it would actually play out.  Gold and silver rallied even stronger up to 2011 and 2012 on fears it would play out with inflation.  However all it did was inflate financial assets, the ‘don’t fight the Fed’ trade prevailed and ears were pinned back on the free money rocket.  Only now, a decade later, are we seeing the implications of such monetary stimulus largesse playing out and large scale fiscal stimulus joining central bank stimulus to change the game.  The following chart of gold versus the S&P500 tells the story:

And zooming right back we can see the epic set up of the above chart in historic context:

As one would expect the chart shows gold spiking during periods of sharemarket turmoil.  That negative correlation with shares is the reason many people hold it.  Almost like insurance.  But you will note 2020 barely registered on that scale.  Such was the speed and ferocity of the stimulus response, it was halted in its tracks.  But if you look at the year alone in the chart below you still get a clear picture of this reverse correlation playing out DESPITE the correction after August into the end of the year.

Looking back over history the story is a consistent one as you can see in the table below.  Since the Great Depression and each market crash since, the S&P500 has averaged 37% falls whilst in the same period gold averaged 10%, or in other words outperformed by 47%.

And finally the following chart is one for the thinkers, the contrarians, and not the FOMO’s.  It shows the relative performance of gold with compounding annual growth over contextual periods. Firstly since we commenced this epic credit cycle in 1971 where you can see it has held it’s own and only materially exceeded by the S&P500 which is a major recipient of credit.  We then have the period since 1999 which heralded the more active participation of central banks, the end of the last gold secular bear market, and the bottoming of that gold/S&P500 ratio and both the dot.com and GFC crashes.  No surprise that gold dominated.

But just check out the last chart since 2009 and against what we discussed above.  Shares are up strongly, next but distant gold and then look at commodities in the negative.  This plays in perfectly with the thesis that we are at the point where all this debt based, stimulus fueled, fundametals-less, high ‘growth’ low inflation market largesse starts to meet its maker and gold, silver and commodities in general have their next bull run.

Tomorrow we will discuss what that trigger may be.