Home Correction letter Gold’s relative performance is a red flag

Gold’s relative performance is a red flag


Since the start of 2022, gold has shown resilience against other asset classes, indicating that its historical hedge against financial instability remains intact. Back in 2014, I said gold wouldn’t see a big move until cannabis and crypto run their course. With the latter up for the award as the year’s biggest investor value killer, it looks like gold now has the perfect storm to hit new highs.

Basically, there has never been a worse time for the markets, or a better time for gold. The crypto community is now proving with increasing frequency why a decentralized, non-sovereignty backed monetary wannabe can never achieve currency status.

The “war” in Ukraine is beginning to resemble modern Vietnam by proxy, and sovereign debt levels are such that many countries are technically insolvent. Including the United States.

With interest rates now above 6% for a 30-year fixed-rate mortgage, real estate has already entered the biggest correction in its existence since 2008.

In fact, 2008 was the start of what would have been another Great Depression, but the shock of quantitative easing and the scare tactics deployed after the collapse of Lehman Brothers had pushed that financial meltdown into the future.

But that future is now, and QE’s ability to influence sentiment has diminished, and the abundant liquidity that still exists in the system has run out of synthetic assets to chase, which is now pushing commodities higher.

We know that G7 governments are extremely sensitive to continued weakness in stock markets, but we also know that the Fed et al are in agreement in perceiving more stimulus as the only thing worse than doing nothing. Will they try to lower rates in the face of a tsunami of foreclosures? Will they throw caution to the wind and try to blow minds with monthly stimuli measured in the trillions?

At this time, nothing is excluded for central bankers, who are required to do what governments ask of them.

Which brings us back to the question of gold.

Among critics of the monetary system who clearly apprehend the stimulus and ZIRP to be the equivalent of slamming fentanyl into the veins of a heroin addict, the consensus is that for years the price of gold n hasn’t reflected the fair value of gold, thanks in large part to poor, opaque regulation of the futures market.

Thus, there is a decade of upward compression in the price of gold that only needs a huge abdication of confidence in the markets to uncork it. Many believe that the price of uncompressed gold is around $5,000 an ounce.

Regardless of what you think, from a technical standpoint, gold seems to be the big winner of 2022, given that it’s up against every other asset class.

Asset Cumulative performance since the beginning of the year
Gold +1.15%
NASDAQ -31.6%
S&P500 -21.8%
DJI -16.6%
Bitcoin -54%
Immovable (SIXRE) -23.9%
Goods (DJCI) +27.41%

With QE cut plans still rolling, and with interest rates now climbing, and with inflation entrenched above 8%, there is mathematically no choice but recession. and maybe depression.

This will be the moment when history teaches us that, albeit with human ingenuity and self-deception, the inevitable can be postponed, but never undone.