Gold, Stocks and Stagflation

Includes: DBP, DGL, DGP, GLD, IAU
by: Mark McHugh

My favorite fantasy role-playing game is one I invented called, I’m Smart and I have a Time Machine! (I’m working on a better title, so step off).  The object is to develop a strategy for a given time period

My latest challenge is the 1970s.  The word stagflation is creeping back into the national vocabulary, and I heard “Disco Inferno” last weekend.  I’m not sure if these are omens, but I’m not gonna wait to see Dennis Kneale in a leisure suit before I make a plan.  So what were the right moves in the 1970s? 


A great strategy for coping in the 1970s was:

  1. Buy Gold
  2. Smoke weed.
  3. When the Fed funds rate has risen 10%, start rotating back into stocks.

If you're anything like me, you probably only got one out of three right during this era (probability not worthy of a Meatloaf song)

That was then, this is similar?

If you believe that we are watching a rerun of That 70s Show, you may want to figure out where the “YOU ARE HERE” sticker belongs on the chart.  Perhaps, a more important take-away is that monetary policy does not always work as advertised and financial “Axioms” are often false.  Stocks did not outperform inflation. Cumulative inflation for the decade was over 110% (source:   The notion that there is an inverse relationship between interest rates and gold begs the question, “are you high?”  It took massive, very real changes in policy to end stagflation.   Don’t expect Hawkish jaw-boning and Swiss army knife-rattling to have a sustainable impact.

Back to the Future…

So, I emerge from my time machine, back to the land of round the clock world market coverage and instant analysis by an endless parade of pundits, wondering what I should do with my gold positions.  Would anyone out there like to swap a pair of bell-bottoms for a tin foil hat?  One more thing; I think introductions are in order between Jim Sinclair and Guy Adami.

Fun Facts: Guy Adami has served as head gold trader at both Drexel Burnham Lambert and Goldman Sachs.  He now can be seen bashing gold nightly on CNBC’s “Fiat Fast Money”.

Disclosures:  Author has long gold positions, but doesn’t smoke weed anymore (honestly).