Here is why gold is surging $30 and silver $1.25.
When Everyone Throws In The Towel On Gold
December 20 (King World News) – Otavio Costa: Without calling out any names, market sentiment has been so negative towards gold that even experts in our industry are losing faith in the metal.
With highly conductive properties and unmatched malleability, ductility, durability, approximately 10% of gold’s demand comes from technology, including electronics, which establishes a strong floor for its intrinsic value.
The metal’s broad range of uses and incredible level of natural scarcity is the reason it is one of the most desirable resources on earth.
As a result, it has been a universal monetary asset for millennia.
But, to be fair:
Today’s skepticism towards gold, particularly by younger generations, is completely logical.
The last 30 years were graced with a prosperous period of cheap labor, abundant natural resources, and an exceptionally globalized macro environment.
All these factors have been severely reversed today…
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Decades of cheap money allowed countries to accumulate debt while generating gradually less units of economic growth.
Such a lack of monetary discipline is unsustainable.
We are now in the early stages of seeing the consequences of these macro imbalances:
* Rising inequality
* Political polarization
* Geopolitical conflict
* Rising cost of living
* Shortages of natural resources, etc…
Skeptics are likely to soon learn a valuable lesson as to why gold is such a critical part of the world’s monetary system.
Let’s not forget that throughout history:
Major positive inflection points start from ultra-depressed sentiment.
On that note, it was encouraging to note that, two months ago, the Wall Street Journal published the following print on the front page of its business section stating:
“Gold Loses Status as Haven”
This article helped to spur what appears to us to have been a major cyclical capitulation bottom for gold just four days later.
From a macro perspective:
There is a profusion of indicators supporting our precious metals thesis today.
However, the one measurement every investor should pay close attention to today, is the % of inversions in the US Treasury curve.
We created this indicator in 2018 after noticing how independent yield spreads often provided very premature signals about the risk of a recession…
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To help our investment process:
We built a much more comprehensive indicator that calculates the percentage of inversions across all possible yield spreads in the Treasury curve.
What we found is that every time this indicator went above the 70% handle, it coincided with a steep recession since 1970.
More importantly, for portfolio positioning purposes, this indicator gives our strongest macro signal to buy gold and sell stocks.
It’s Time To Buy Gold And Sell The Stock Market
Empirically, when the percentage of yield curve inversions goes above the 70% handle:
It is time to be long gold and short the S&P 500.
In the 24 months after all seven prior instances of the signal, equal dollars invested on each side of this trade returned an average of 72% before dividends.
This Is What Happens When Gold Outperforms The Stock Market
What is even more interesting is to look at how it performed in the two economic environments that are most comparable to the one we observe today.
We believe that the current macro climate most closely resembles the ones that preceded both the 1973-74 stagflationary recession and the early 2000s tech bust.
Using these two periods as analogs, buying the traditional central bank reserve metal and selling short the most popular US equity benchmark averaged an even more impressive 147% over the next two years excluding dividends….the blue line in the chart below.
WHEN THE TIDE TURNS: Buying Gold And Selling Short The Stock Market Returns An Average 147% In 24 Months
Interestingly, the recent chart of the gold-to-S&P 500 ratio looks incredibly compelling.
With such a strong macro tailwind, the ratio appears ripe for a major breakout from its multi-year resistance.
Gold Preparing To Explode Higher vs S&P 500
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