The Gold Bull Cycle: A New Beginning

Understanding Cycles

Cycles are a part of our everyday lives, from our daily routines to the functioning of markets. These cycles respond to various factors such as light and darkness, interest rates, regulation, monetary policy, and investor psychology. Precious metals, like gold, are no exception to this cyclical behavior.

Gold vs. S&P 500

From 2000 to 2011, gold significantly outperformed the S&P 500. Another instance of this was from 1972 to 1980 when gold returned 1,256% compared to the S&P 500’s 97%. However, stocks have also had their moments of dominance. From 2012 to 2021, stocks returned 336% versus gold’s 16%. Similarly, from 1980 to 1999, stocks were in the spotlight while gold remained dormant for nearly two decades. This cyclical pattern is evident in the chart showing the ratio of S&P 500 performance vs gold through 2021.

Precious Metals Cycle

There is a belief that we have entered a new precious metals cycle at the beginning of this year. If this is indeed the start of a new cycle, we could potentially see precious metals outperforming stocks for the next seven years or more.

Gold Outperforms During Chaotic Times

Gold tends to outperform during chaotic periods. Past catalysts for this have included a crash at the end of a major bull market, an inflationary shift in monetary policy, and wars. Wars often cause deficits to spike, increase the monetary supply, and drive safe-haven demand from both central banks and investors.

Current Market Conditions

Currently, stocks are performing well, but markets appear expensive. Almost all U.S. stock sectors are in their top quartile of historical valuations. While the broad bubble in U.S. stocks could continue for longer than expected, the focus is now shifting towards precious metals and certain foreign markets.

Debt and Global Liquidity

The U.S. and many other countries are reaching a tipping point with debt. Total global debt has reached $315 trillion, which is 333% of global GDP. The Federal Reserve has switched into easy-money mode and is likely to initiate formal QE soon. China’s central bank has also injected massive liquidity to boost its sluggish economy. More countries are expected to follow suit, and global liquidity is set to surge.

Military Spending and Conflicts

There are multiple wars and conflicts currently taking place in Yemen, Ukraine, Israel, Iran, and beyond. Military spending is increasing, with Russia allocating 40% of its total budget to defense, and China's defense spending now rivals the U.S. in terms of purchasing power parity (PPP). The U.S. is also increasing its spending and production.

Future of Precious Metals

The stage is set for a powerful precious metals bull market cycle. The problems facing the world are not going away anytime soon. Even if all the conflicts end tomorrow, we’re still facing a structural debt problem of unprecedented magnitude. Further conflict and spending will only add fuel to the fire.

Market Complacency

For now, markets seem complacent that all is well with the economy. However, this won't last forever. If there is a pullback in gold and silver prices, it could present an amazing opportunity to invest.

Bottom Line

The cyclical nature of markets, particularly precious metals like gold, is a fascinating aspect of economics. With the current global conditions, it seems that we may be entering a new cycle where gold could potentially outperform stocks. However, only time will tell if this prediction holds true. What are your thoughts on this matter? Do you think we are indeed entering a new gold bull cycle? Share your thoughts and this article with your friends. Don't forget to sign up for the Daily Briefing, which is available every day at 6pm.