“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value.” - Alan Greenspan
Allow me to start off this article by making it very clear that I am by no means a “Gold bug.” Everything I do in markets relates to interpreting market movement through the lens of intermarket analysis, and taking a deep dive into asset classes and investment themes as I do in the 20+ page weekly Lead-Lag Report.
By far and away, the most disturbing trend out there is in bonds. It appears inflation expectations are not rising regardless of the amount of on-going money printing. This is unequivocally not just a US phenomenon. We are in a global situation where major economies, like Germany, are seeing a complete destruction of return on anything fixed income.
Bonds have historically been the best hedge against market declines and volatility, with government debt being the truest diversifier in the sense that in risk-off periods, there is a “flight to safety” that pushes bond prices (TLT) up and yields down. But we have a problem here should this momentum in bonds continue and yields globally in respective countries push to zero, or even potentially go even more negative in some instances. This especially in light of where we are in the expansion cycle. The S&P 500 (SPY) appears to only now be getting the message of reflation hope being misguided.
That problem? If the cost of capital has no cost, capitalism as we know it breaks.
What does any of this have to do with Gold (GLD)? Numerous studies have shown that Gold is neither an inflation hedge, nor a deflation hedge over time. Gold is however a diversifier in the sense that in periods of heightened market stress, the performance of Gold tends to counteract stock market volatility by catching its own flight to safety bid. In the 2015 NAAIM Founders Award winning paper I provide signals on in the Lead-Lag Report, the predictive power of Gold relative to Lumber is undeniable as a risk-off tell precisely became Gold benefits from periods of market stress. Recent action confirms that movement as a breakout from a cup and handle formation completes.
Gold then may end up actually being a better diversifier than bonds should these yields get even more extreme on the downside. Why? Because if yields go towards negative and even more negative, then the yellow metal, with a yield of 0%, ends up having more yield than bonds, and ultimately provides more of a hedge in the event that the bond market is indeed anticipating a major deflationary wave and global economic recession to come. Note that the behavior of Gold is the argument here – in my next piece I’ll address Gold Miners (GDX), which are in many ways a completely different animal, but also could catch a strong bid as we enter the Summer months.
Will Gold save us all from bonds pricing in Armageddon?
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Markets aren’t as efficient as conventional wisdom would have you believe. Gaps often appear between market signals and investor reactions that help give an indication of whether we are in a “risk-on” or “risk-off” environment.
The Lead-Lag Report can give you an edge in reading the market so you can make asset allocation decisions based on award winning research. I’ll give you the signals--it’s up to you to decide whether to go on offense (i.e., add exposure to risky assets such as stocks when risk is “on”) or play defense (i.e., lean toward more conservative assets such as bonds/cash when risk is “off”).
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.