Gold prices have tumbled a long way from their peak in 2011, but there’s new evidence to suggest a turnaround for the yellow metal. The conclusion you inevitably arrive at after combing through the data is this: a stock market crash is coming, and gold is one of the few places left to hide.
There are several causes for an eventual upswing in gold, but you’re unlikely to hear about them from traditional media sources. The conventional wisdom of the day has turned incredibly bearish on gold, feeding into a massive sell-off. Gold is down nearly 8.5% this year—from $1,189 to $1,086—despite headwinds in the form of a Chinese stock market crash and a Greece-EU standoff.
As investors have rushed away from precious metals, they’ve simultaneously gotten bullish on equities amid a curiously low interest rate environment. What’s going on? What’s putting all this downward pressure on gold prices?
The Federal Reserve Built a Stock Market Crash
In answering this question, investors should turn their gaze to the wellspring of America’s money supply: that’s right, folks, I’m talking about the Federal Reserve.
Traditionally, central banks focused their attention on inflation, but a 1977 amendment to the Federal Reserve Act expanded their mandate. The central bank was now responsible for stable prices and maximum employment. Most of the Fed’s actions in recent years are rooted in this “dual mandate,” which has had a profound effect on gold prices. To understand what I mean, think back to the 2010 midterm elections.
Fiscal stimulus became a non sequitur after Republicans took control of the House, prompting America’s central bank to fill the gap. One day after the election, the Federal Reserve announced an ambitious $600 billion quantitative easing program.
The logic here was a little warped: buy bonds to stabilize asset prices and pray to the god of printing presses that stability can translate into employment. Known as QE2, the program followed a $1.7 trillion spending binge between 2008 and 2010. (Source: MarketWatch, last accessed August 6, 2015.)
QE2 was slated to end in 2011, but reality doesn’t bend for anyone, not even the Chairman of the Federal Reserve.
Safe Haven Demand Could Push Gold Sky High
Anaemic growth pushed the program into 2012 before inducing another round of bond buying. The Fed pumped $85.0 billion, that’s billion with a “B,” into the economy every month. Between 2007 and 2015, the central bank’s balance sheet quadrupled from $1.0 trillion to $4.0 trillion. Now we’re talking trillion with a “T.”
The primary result of easy money policies was a stock market boom:
As you can see, there’s a direct correlation between growth in the money supply and gains made by the Dow Jones Industrial Average. Now look what happened to wages over the same time frame:
Besides the nonexistent wage growth, there’s the abysmal unemployment situation. Although the top line figure of 5.3% is touted as proof of an economic recovery, I’m not entirely convinced. The rate jumps to 11.3% when you add in part-time workers and those who lost hope of finding a job. (Source: Bureau of Labor Statistics, last accessed on August 6, 2015.)
Let that sink in: more than one in ten Americans are not gainfully employed. Now I’m not a mathematician, but those numbers don’t add up with a bullish stock market.
If you’re used to hearing that the S&P 500 is hitting all time highs, or that the Dow Jones is shattering previous records, it means the market is drunk on optimism. Once again, Wall Street has convinced itself there is nowhere to go but up.
When they realize how hollow the recovery has been, panic will ensue. It will be a stock market crash the likes of which we can scarcely imagined, and hard assets like gold will be the only place left to hide.