Gold’s Relative Performance is a Wake-Up Call

Since the beginning of 2022, gold has exhibited price resilience relative to other asset classes that indicates its historical hedge against financial instability remains intact. Back in 2014, I stated that gold wouldn’t see a big move until cannabis and crypto had run their course. With the latter vying for Largest Slayer of Investor Value award of the year, it looks like gold now has the perfect storm to reach new heights.

Fundamentally, there has never been a worse time for markets, nor better weather for gold. The crypto community is now proving with increasing frequency why a decentralized, non sovereign-backed monetary aspirant can never achieve currency status. 

The ‘war’ in Ukraine is starting to look like modern day Vietnam by proxy, and sovereign debt levels are such that many nations 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 largest correction of its existence since 2008.

In fact, 2008 was the onset of what would have been another Great Depression, but the quantitative easing shock and awe tactics deployed after Lehman Brothers went down had deferred that financial collapse into the future.

But that future is now, and the ability of QE to influence sentiment has waned, and the teeming liquidity that still exists in the system has run out of synthetic assets to chase, so now drives commodities higher.

We know that G7 governments are extremely sensitive to persistent stock market weakness, but we also know that the Fed et al are aligned in perceiving more stimulus to be the only thing worse than doing nothing. Will they attempt to pull rates down in the face of a tsunami of foreclosures? Will they throw caution to the wind and try to blow minds with monthly stimulus measured in trillions?

In this era, nothing is off the table for central bankers, who are bound to due what the governments ask them to.

Which brings us back to the question of gold.

Among monetary system critics who apprehend clearly that stimulus and ZIRP are the equivalents of slamming fentanyl into the veins of a heroin junkie, the consensus is that for years, the price of gold has not reflected the fair value of gold, thanks in large part to the opaque mal-regulation of the futures market.

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

Regardless of what you believe, from a technical perspective, gold is looking like it could be the breakout winner of 2022, considering it is up relative to any other asset class.

Asset YTD Performance
Gold +1.15%
NASDAQ -31.6%
S&P 500 -21.8%
DJI -16.6%
Bitcoin -54%
Real Estate (SIXRE) -23.9%
Commodities (DJCI) +27.41%

With QE reduction plans still moving forward, and with interest rates now screaming higher, and with inflation entrenched above 8%, there is no option mathematically but for recession and perhaps depression.

This will be the moment where history teaches us that, while with human ingenuity and self-deception, the inevitable can be deferred, but never cancelled.

James West

Editor and Publisher

James West founded Midas Letter in 2008 and has since been covering the best of Canadian and US small cap companies. He covers global economics, monetary policy, geopolitical evolution, political corruption, commodities, cannabis and cryptocurrencies. As an active market participant, James is not a journalist and is invariably discussing markets...
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