Many reputations have been destroyed by confidently boasting of impending financial carnage, only for central banks to tease, hint, and print, saving the day once again. Conventional wisdom currently dictates that as long the politicians and the central banks are intervening then the markets cannot fall. This wisdom is especially espoused during an election year in the United States, which, of course 2020 is.
It has been clear for some time that the correlation of market moves to company earnings or economic growth broke down some time ago. It has been demonstrated, especially last year that bad data is always better for markets than good data as with bad data, the chances of easier policy increases.
However, this disconnect can only act for so long, especially as inflation starts to rise. It would be prudent to keep an eye on the below issues in the coming weeks and months. Any panic of volatility will surely also bring the Gold price higher.
This is now well above the dot-com bubble peak. President Trump declared “this is an economic boom the likes the world has never seen before” while legendary hedge fund manager stated “it’s just the craziest monetary / fiscal mix in history. It’s so explosive, it defies imagination. It reminds me a lot of early 1999. You can’t make it up. Crazy times.”
Additionally, another hedge fund titan, Ray Dalio said “The depreciation of the exchange rate and the printing of money over the next few years is going to be the biggest thing,” he said. “Cash is not gonna be good.”
Ray Dalio warns ‘cash is trash’ as Warren Buffett sits on $128 billion
His firm, Bridgewater, also noted a week previously that:
“Bridgewater sees gold spiking 30% to a record high — ‘There is so much boiling conflict’
On the other side, Warren Buffet, far from seeing cash as “trash”, has been increasing his:
If the market crashes then Buffet, as a value investor, will have plenty of ammunition to pick up some bargains. If it soars like Dalio says, then it will because of money printing. Difficult to see either way why gold would go down.
Is there really no-one caring about inflation in central bank circles. Markets may be surprised, if inflation does appear more and more, there are still some out there who will fight it.
Fed’s Kaplan says rates ‘appropriate,’ flags balance sheet concern
And with so few people benefitting from soaring assets globally, when it comes to politics a leader would happily let the stock market come off from all-time highs if basic living costs start going up in price dramatically. India is already above target:
And China is moving in similar direction:
Noted strategist Rupal Bhansali has also said: “We are so used to hearing that inflation is below the 2% target. It isn’t. It’s over 2% in the U.S., and wage inflation is running well north of that.” (Barronsonline). Inflation is not something that suddenly appears out of nowhere. Some economists liken it to a frog in boiling water. It’s only when it’s too late that it becomes hot.
However, even some assets are starting to cool now. 76% of IPOs of IPOs are losing money now, almost at the same level in 2000 (BearTrapsReport). Furthermore, the widely followed Venture Capital Barometer is down 39% from the June 2019 high. VC deal volumes are down 24% while exits are down 35% (CrescatCapital):
If inflation continues to rise in basic goods, while deflation begins in overvalued assets then that is the perfect storm that no central banker or politician would ever dream to face.
It really does appear at this juncture that a correction, or even a crash would show a flight to safety to Gold, while any signs of real inflation emerging would also mean Gold would out-perform as a safe haven. Perhaps that is why this chart below is so important. The Dow Jones is now at the same level in Gold terms as just before the Great Depression:
History maybe doesn’t repeat itself exactly. But it certainly rhymes. Markets are still in exuberance mode and the conventional wisdom that they can only go up is predicated on so many factors, of which only a few are actually controllable.
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Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, this does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.