Historical Review: Gold Should Lead Stock Market Higher (NYSEARCA:GLD)

If you think back to previous bear markets in equities since the United States abandoned the official convertibility of paper dollars into gold in the early 1970s, gold has always been a great protector of wealth for significant periods of time. sell-offs and early rising assets once the Fed gives in and begins to ease monetary policy in response.

I’ve suggested increased exposure to gold in particular since last September in numerous articles, including this effort explaining how cheap US$1800 an ounce of gold was trading relative to other assets . And, gold bullion hasn’t disappointed investors who use it as a portfolio hedge or as price improvement speculation. The steady rise in US dollar gold prices has far exceeded the vast majority of individual stocks and every broad index creation, measured from September 2021. In fact, if not for the 10% rise of the U.S. currency in the foreign exchange markets over the past 10 months (which was a remarkable feat during record negative real interest rate differentials over CPI inflation), gold would likely well above $2,000 an ounce today. Gold fared even better in foreign currencies, especially weaker ones like the Japanese Yen shown below.

In this article, I will focus on bear market declines of 10% or more for the Dow Jones Industrial Average since the Great Recession of 2007-09. With the dollar’s rise since mid-2021 keeping gold’s gains in check, overall investor sentiment across all precious metals remains subdued and complacent. I model substantial upside potential for monetary gold, particularly if the Federal Reserve is forced to end its interest rate tightening cycle early to avoid a deep recession in a few months. The current technical picture is also quite constructive for further advances in gold in my view (trading the metal and associated miners for 35 years), regardless of the direction in which US equities move.

Believe it or not, after major stock market lows over the past 15 years, even as equity “fear” trading begins to fade, gold has consistently continued to rise. In other words, during the early stages of a stock market uptrend, gold has always been a great place to invest. A common misconception in May 2022 is that a transition to fear greed on Wall Street will require selling gold. This has not been the case historically. Let’s review.

Historical examples

Below are charts of price changes for the Dow Jones Industrial Average and the biggest investment product for investors, the SPDR Gold Stock ETF (NYSEARCA:GLD), during each downswing of the bear market and the early stages of a rebound from notable lows in the US stock market. We have the current situation plus five instances plotted, with gold performing well on each time frame versus equities as an asset class. What I want you to take away from this exercise is the relative strength of gold during the sell-off and the first two months of each new bull market rally.

Late 2021 – Early 2022 Tech Bust

2020 Pandemic Discharge and Rebound

Fed tightening at the end of 2018

Fix 2015-16

US Treasury Rating Downgrade Panic – 2011

2007-09 Great Recession, Real Estate Bust

Final Thoughts

Holding gold makes sense today, if history repeats itself, or at least rhymes with past stock market cycles. Market pundits are collapsing trying to suggest the smartest ways to hedge inflation and bring bonds/stocks down. The answer may be easy to understand for students looking at past examples of economic and financial calamities. I now have a considerable position in gold, including bullion directly, bullion ETFs and miners. The SPDR Gold ETF, along with other bullion products including iShares Gold Trust (IAU), Sprott Physical Gold (PHYS) and Aberdeen Standard Physical Gold (SGOL), have an excellent chance of positive returns for the remainder of 2022 For a target bullion price, I’m modeling $2,500-$3,000 gold in 2023. You can re-read my past gold articles to find out why.

Traders and Wall Street pundits are currently very bearish on gold, which may signal that a bigger upside is approaching. Typically, sentiment polls with bearish respondents above 70% occur near major commodity or financial market price lows, certainly not highs. The 71% bearish reading in last week’s Kitco survey tells us that hedge funds, financial institutions, banks and futures traders are underweight gold and should be huge buyers if they look back. their bullish positioning in the near future.

As I mentioned and explained before, one of the statistically best times to own gold is when short-term interest rates are trading below the 12-month CPI inflation rate. Today’s record negative ‘real’ yield in the -6% range should support gold quotes over time, particularly if the Federal Reserve fails to quickly bring the problem under control. inflation. A position of regular negative returns relative to basic cost-of-living adjustments would eventually spell disaster for the value of the dollar overseas, as foreign investors are not bound to lose money (power to purchase) in US investments. They would withdraw capital from the United States, potentially crashing the dollar and triggering something akin to hyperinflation in that country. Absolutely the best investment to own in this scenario would be the internationally accepted currency of gold bullion.

I often suggest a 10% gold asset percentage in portfolio design as a starting point, assuming gold’s typical +8% annualized gain since 1969 has a decent chance of materializing. Today, I’m more bullish than usual on precious metals. Record debts all over the world, rampant inflation that will be difficult to slow down as shortages are the root of the problem, bond and stock markets, a low valuation of gold compared to other asset classes or the level of Treasury debt or M1 money supply, and now a weakening economic outlook all argue (in combination) for higher than normal exposure. If you want to hold 15-20% of your brokerage account in precious metal bullion (mostly gold) and related mining assets, I believe such a decision is well supported by logic and history.

Thanks for reading. Please consider this article as a first step in your due diligence process. It is recommended to consult a registered and experienced investment adviser before carrying out any transaction.