Gold price

Historical Review: Gold Should Lead The Stock Market Higher

Sep 23, 2022

Gold

Filograph/E+ via Getty Images

If you look back at previous bear markets in stocks since the U.S. dropped the official convertibility of paper dollars for gold in the early 1970s, gold has consistently been a great protector of wealth during significant selloffs, and an early rising asset once the Fed relents and begins to ease monetary policy in response.

I have been suggesting increased gold exposure in particular since last September in many articles including this effort explaining how cheaply US$1800 an ounce gold was trading vs. other assets. And, gold bullion has not disappointed investors using it as a portfolio hedge or speculation on improving prices. The steady rise in U.S. dollar gold quotes has handily outperformed the vast majority of individual equities and every broad index creation, measured from September 2021. In fact, if not for the 10% rise in the U.S. currency in exchange markets over the past 10 months (which has been a remarkable feat during record negative real interest rate spreads vs. CPI inflation), gold would likely be well above $2000 an ounce today. Gold has done even better in foreign currencies, particularly weaker ones like the Japanese Yen pictured below.

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10-Month Chart, Gold in Yen and US$ - YCharts

In this story, I will focus on bear market declines of 10% or greater for the Dow Jones Industrial Average since the Great Recession of 2007-09. With the dollar’s rise since mid-2021 holding gold gains in check, overall investor sentiment on all the precious metals remains subdued and complacent. I am modeling substantial upside remains for hard money gold, especially if the Federal Reserve is forced to quit its tightening interest rate cycle early to prevent deep recession in a few months. The current technical picture is also quite constructive for further gold advances in my opinion (trading the metal and related miners for 35 years), no matter which direction U.S. equities move.

Believe it or not, after important stock market bottoms the last 15 years, even as the "fear" trade in stocks begins to fade, gold has consistently continued to move higher. In other words, during the early stages of a stock market bull trend change gold has still been a terrific place to be invested. One common misconception in May 2022 is a transition to greed from fear on Wall Street will necessitate gold selling. This has not been the case historically. Let’s review.

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18-Month Chart Daily Values, StockCharts.com

Historical Examples

Below are charts of price changes in both the Dow Jones Industrial Average and the largest bullion product for investors, the SPDR Gold Shares ETF (NYSEARCA:GLD ), during each declining bear market phase and the early stages of a rebound from noteworthy lows in the U.S. equity market. We have the present situation plus five instances graphed, with gold performing well over each span in relation to stocks as an asset class. What I want you to get out of this exercise is the relative strength of gold during both the selloff and the first couple of months of each new bull market upturn.

Late 2021 – Early 2022 Tech Bust

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2020 Pandemic Dump Rebound

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Late 2018 Fed Tightening

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2015-16 Correction

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U.S. Treasury Downgrade Panic - 2011

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2007-09 Great Recession, Real Estate Bust

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Final Thoughts

Holding gold makes plenty of sense today, if history repeats, or at least rhymes with past stock market cycles. Market pundits are falling over themselves trying to suggest the smartest ways to hedge inflation and tanking bonds/equities. The answer may be easy to figure out for students looking at past examples of economic and financial market calamity. I own a considerable gold position today, including bullion directly, bullion ETFs, and miners. The SPDR Gold ETF, plus other bullion products including iShares Gold Trust (IAU), Sprott Physical Gold (PHYS), and Aberdeen Standard Physical Gold (SGOL), have excellent odds of positive returns the rest of 2022. For a target bullion price, I am modeling $2,500 to $3,000 gold sometime in 2023. You can reread my past gold articles to find out why.

Wall Street traders and experts are currently very bearish on gold, which may signal a larger upmove is approaching. Typically, sentiment surveys with bear respondents above 70% occur near major commodity or financial market price bottoms, definitely not tops. The 71% bear reading in last week's Kitco survey tells us hedge funds, financial institutions, banks and futures traders are underweight gold and would have to be huge buyers if they revisit bullish positioning in the near future.

https://www.kitco.com/news/2022-05-13/Bearish-sentiment-points-to-gold-prices-falling-below-1-800-next-week.html

May 13th, 2022 - Kitco.com

As I have mentioned and explained before, one of the best times statistically to own gold is when short-term interest rates are trading below the trailing 12-month CPI inflation rate. Today’s unprecedented negative “real” yield in the -6% range should support gold quotes over time, particularly if the Federal Reserve cannot get control of the inflation problem soon. A position of regular negative yields vs. basic cost-of-living adjustments would eventually prove catastrophic to the dollar’s value overseas, as foreign investors are not required to lose money (purchasing power) in U.S. investments. They would pull capital out of America, potentially collapsing the dollar and unleashing something akin to hyperinflation in this country. Absolutely, the best investment to own under this scenario would be the internationally accepted currency of gold bullion.

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Record Negative Real Yields, YCharts

I often suggest a gold asset percentage of 10% in portfolio designs as a starting point, assuming gold’s typical +8% annualized gain since 1969 has decent odds of playing out. Today, I am more bullish on precious metals than usual. Record debts all over the world, spiking inflation that will be difficult to slow as shortages are driving the problem, tanking bond and equity markets, a low gold valuation vs. 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 metals bullion (mostly gold) and related mining assets, I think such a decision is well supported by logic and history.

Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.

This article was written by

Paul Franke profile picture

Nationally ranked stock picker for 30 years. Victory Formation and Bottom Fishing Club quant-sort pioneer.....Paul Franke is a private investor and speculator with 35 years of trading experience. Mr. Franke was Editor and Publisher of the Maverick Investor® newsletter during the 1990s, widely quoted by CNBC®, Barron’s®, the Washington Post® and Investor’s Business Daily®. Paul was consistently ranked among top investment advisors nationally for stock market and commodity macro views by Timer Digest® during the 1990s. Mr. Franke was ranked #1 in the Motley Fool® CAPS stock picking contest during parts of 2008 and 2009, out of 60,000+ portfolios. Mr. Franke was Director of Research at Quantemonics Investing® from 2010-13, running several model portfolios on the Covestor.com mirror platform (including the least volatile, lowest beta, fully-invested equity portfolio on the site). As of April 2022, he was ranked in the Top 5% of bloggers by TipRanks® for stock picking performance on positions held one year. A contrarian stock picking style, along with daily algorithm analysis of fundamental and technical data have been developed into a system for finding stocks, named the “Victory Formation.” Supply/demand imbalances signaled by specific stock price and volume movements are a critical part of this formula for success. Mr. Franke suggests investors use 10% or 20% stop-loss levels on individual choices and a diversified approach of owning at least 50 well-positioned favorites to achieve regular stock market outperformance. The short sale of securities in overvalued, weak momentum stocks as pair trades and hedges is also a part of the Victory Formation long/short portfolio design. "Bottom Fishing Club" articles focus on deep-value candidates or stocks experiencing a major reversal in technical momentum to the upside.

Disclosure: I/we have a beneficial long position in the shares of GLD, IAU either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This writing is for educational and informational purposes only. All opinions expressed herein are not investment recommendations, and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity and is not a registered investment advisor. The author recommends investors consult a qualified investment advisor before making any trade. Any projections, market outlooks or estimates herein are forward looking statements and are based upon certain assumptions and should not be construed to be indicative of actual events that will occur. This article is not an investment research report, but an opinion written at a point in time. The author's opinions expressed herein address only a small cross-section of data related to an investment in securities mentioned. Any analysis presented is based on incomplete information, and is limited in scope and accuracy. The information and data in this article are obtained from sources believed to be reliable, but their accuracy and completeness are not guaranteed. The author expressly disclaims all liability for errors and omissions in the service and for the use or interpretation by others of information contained herein. Any and all opinions, estimates, and conclusions are based on the author's best judgment at the time of publication, and are subject to change without notice. The author undertakes no obligation to correct, update or revise the information in this document or to otherwise provide any additional materials. Past performance is no guarantee of future returns.


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