A Catalyst for Collapse
Inflation, FED intervention, Equities vs Commodities and considerations on the mitigation of risk in uncertain times
Gold and it’s accumulation and fluctuation in value dictates society, and it has done for millennia. Everyone desires a crystal ball. After all, it’s the favourite go to remark for any self respecting, sometimes reflecting citizen as they wander through the highly volatile, unpredictably treacherous world of hindsight.
When applied to investing and more importantly, preserving wealth, the conceptual crystal ball becomes even more desirable. I, along with the majority of market observers, do not have such a solution in my possession, however it hasn’t stopped me from attempting the impossible, or at the very least, settling for the next best thing. Historical Proof.
Ordinarily, one would think that gold, being as pure and unobtrusive as it is, would be one of the less divisive topics of the investing world. Ironically, it’s arguably one of the most controversial, mostly thanks to the ardent believers that sit either side of the fence.
On one hand, you have the traditionalists, those that truly respect gold’s proven potential as a store of wealth well past the earliest forms of documentation. Whereas the opposing side’s view can typically be collated and surmised as a reluctance to acknowledge historical proof, or a misinterpretation of Gold’s most pertinent power. Especially in today’s climate. Most of the arguments against gold stem from the logic that your money (imputed, reputation dependent currency) is better off elsewhere (in other forms of erroneously valued, realistically worthless assets) and the time and capital allocated to playing it safe would find more utility when exposed to potentially far greater returns. [Blockchain, Reign and the Paper Parade]
In some respects, gold’s antagonists are correct. As much as gold maintains serious strategic importance in times of crisis it doesn’t necessarily perform all that well during the more common periods of expansive economic growth. If anything, gold has a delayed, inverse relationship to equity markets. This phenomenon is evidenced in the way the gold price reacts simultaneously with major indices during times of severe volatility before decoupling and taking off in an upwards trajectory .
Take the months preceding and following the 2008 crash as an example. From September 2007 (in conjunction with the last 2 months of the equity bull run), gold broke out of a 12 month resistance below all time highs that had stood since way back in 1980 at the end of the stagflation crisis  . Upon clearing the $700 USD mark, it persisted to make new highs up to a peak of $1032 USD in March of 2008 before falling over 30% to a low of $679 USD in October the same year. [Gold Dips, the Good, the Bad, the Great]
This was almost identical to the price action of the DJIA .
There are many situation sensitive explanations as to why the gold price has always fallen immediately with equities (before breaking out higher). The most widely accepted of these is the prevalence of hedging and the subsequent consequences to the market that are observed as traders find themselves facing margin calls due to tanking asset prices. Typically in these scenarios, investors choose to sell (close) their remaining profitable trades in order to cover the losses incurred on the more risky, leveraged products in their portfolio. Of course, true to gold’s billing as the purest form of wealth preservation, along with it’s potential to undermine flawed monetary systems, it almost always reacts strongly to the usual macroeconomic interventions to dilute dollars and inflate asset prices during times of crisis.
When you compare the Gold price to the Dow Jones Industrial Average (DJIA) the ‘delayed inverse correlation’ becomes relatively self explanatory.
From the same date of September 2007, the Dow made one final attempt at higher highs which it successfully achieved before beginning the first of what would become a 16 month bear market, reducing it’s value by almost 60% and sending it from a high of $14,198 in October 2007, to a low of $6469 in March 2009.
Ultimately an investor in gold at the beginning of 2008, would’ve had to wait a year, riding out the price fluctuations until they exceeded their initial entry. However from February 2009, the gold price broke out and never looked back until it’s peak of $1920 USD in September 2011. This represented a 300% gain from the lows reached at the bottom of the 2008 crash.
On the contrary, capital invested in the DJIA at the beginning of 2008 would have been worth approximately 30% less in September of 2011. It would have taken an investor nearly 5 years before they could’ve recouped their nominal losses with an investment in the DJIA. And this is without adjusting for inflation.
This is why I believe an investment in gold is so crucial for a sustainable, healthy portfolio. Sometimes investing is less about making money, and more about limiting losses. In reality, if you can double or triple your capital during a market crash and then be in a position to invest in the newly affordable risk-on asset classes, then you’re doing far better than the person who rides the bear market for half a decade only to be back where they started. When adjusted for inflation, it would have taken an investor in the DJIA until January 2022 to double their capital. Gold achieved the same inflation-adjusted return by 2011, in just 3 years.
But what about Bitcoin? In my opinion, Bitcoin is an entirely different story. As much as it’s understood to be some sort of decentralised cure to the current, highly centralised monetary system, it’s proved itself to perform almost identically to the major benchmark equities indexes globally. Now this could easily be attributed to the fact that Bitcoin has only ever existed in a heavily dovish, highly inflationary environment. Since its inception, global monetary policy has been historically weak and up until now, it has continued on such a trajectory. This is where it gets interesting for Bitcoin and the Crypto market as a whole. [Why Gold is Bullish When Bitcoin dips]
With the threat of tapering and the complete reduction of QE, risk-on assets find themselves in a rather precarious situation. Can they sustain the heavily overvalued prices that have been supported solely by stimulus, or will they capitulate to lows previously seen prior to the 2020 Covid Crash. My guess is the latter. In the case of Bitcoin, it still remains to be seen whether it can survive a period of rising interest rates and minimal QE, but if history is anything to go by, it doesn’t look pretty.
In the end, Gold is insurance for opportunity. Throughout history, gold has sustained a steady increase in value, paring capital losses against inflation and maintaining purchasing power through the inevitable rise and fall of every economic cycle and subsequent geopolitical crisis. [Gold Through the Ages]
Once again, we find ourselves at a crossroads. One brought to us at the behest of record breaking QE and rapidly increasing inflationary pressures.
I guess it all comes down to one question. How greedy are you? And how greedy are they?
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