Slow Growth, GET GOLD
When it’s storming outside and trees are bending in the wind, suddenly everybody wants to buy hurricane insurance. Of course, by that point it’s often too late as the insurance is prohibitively expensive, if you can even get it.
The financial markets really aren’t any different. Many retail investors only think about getting prepared for worst-case scenarios when they’re already in the eye of the storm. Now, people are running for cover and seeking shelter, but it seems like there’s no place to hide anymore.
It’s been particularly tough on unprepared Generation Z traders, whose experience has been that stocks and ETF’s only go up. Even COVID-19 couldn’t keep equities down for more than a couple of months, and the post-crash rebound was among the most swift and powerful in stock market history.
But then, the pace of that “recovery” was artificially expedited by unprecedented injections of liquidity into the banking system along with massive stimulus programs. The other shoe was bound to drop at some point, and here we are with two consecutive inflation prints of 8% or higher.
Young traders might not know what stagflation looks and feels like, but older investors do and they’re starting to feel a distinct sense of déjà vu in 2022. And, they’re pulling their money out of the markets fast: after sixth straight weeks of losses, a record $7 trillion in value has been erased from of the stock market (compared to $4.6 trillion during the dot-com crash and $4.4 trillion during the COVID-19 crisis).
Welcome to the other side of investing, folks – the hard part, where stock prices don’t only go north. Popular cryptocurrencies like Bitcoin and Ethereum, which have been closely tied to technology stocks lately, haven’t fared any better.
In most of the recessions (defined as two consecutive quarters of negative GDP) on this chart, gold posted gains even while stocks tanked. In the few times that gold didn’t show gains, the drawdowns were relatively mild and manageable.
Even in the financial crisis of 2008-2009, gold ultimately moved higher. It started to fall in October 2008 when the crisis first happened, but the gold price soon recovered and was actually 17.5% higher when the recession ended.
So, there’s no denying that gold is a safe haven and a crisis hedge – history proves this. Could holding gold also provide a growth opportunity, though? Circling back to the dollar, we can see how inflationary versus anti-inflationary assets are always at a tug-of-war, and the anti-inflationary assets always win in the end.
This is the primary appeal of cryptocurrency, though not everyone has the stomach to tolerate the 50%+ price swings in Bitcoin, Ethereum, and so on. Gold is an anti-inflationary asset just like Bitcoin and Ethereum are but with a much longer history and a tangible quality that digital assets don’t possess.
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In response to the COVID-19 crisis, world governments printed up massive amounts of fiat currency to provide “stimulus,” and the U.S. outdid everyone with many billions of dollars printed and spent in a matter of months.
The full impact of a ballooning money supply hasn’t been fully felt until 2022, and this is happening at the worst possible time for the stock market. While the inflation rate is above 8%, the Federal Reserve is forcing slow growth upon the economy with relentless interest rate hikes.
These interest rate increases will last throughout the year and possibly into next year as well. The economy is bound to slow down because higher interest rates mean that businesses and people won’t be incentivized to borrow money. At the same time, consumers will spend less money due to runaway inflation since so many things are becoming unaffordable, and that’s bad for America’s businesses.
However, what’s bad for businesses, the consumer, and the economy in general is good for gold. When the money supply is increased quickly and inflation rises, gold rallies – it’s as simple as that.
Take, for example, the massive inflationary surge of the early 1970s. This happened when the dollar was decoupled from gold: the gold standard was ended and the government was free to print up dollars without consequence – or so it seemed.
There definitely were consequences in the form of persistently slow economic growth and high inflation, also known as stagflation. Many economists are considering the possibility of stagflation happening this year. It’s conceivable that we’re there already.
Gold thrives when the dollar dives, and it’s an inverse relationship that has stood the test of time. Thus, growing your wealth while protecting it at the same time isn’t as hard as you might have thought: after all, if you’ve got gold then you’ve got real value, not government promises.
Chief Editor, CrushTheStreet.com
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