Gold’s Big Rally Is A Heads-Up For Rotation, Not Destruction

Winds of change are blowing fiercely across financial markets. Some of it is happening within the equity market itself, as we have detailed this month in the start-stop tradeoff in leadership between the Nasdaq NDAQ and Russell, value against growth. That’s still going on, though sluggish to pick up speed with rates pinned down and weighing on the financial sector.

The more groundbreaking move capturing investors’ attention is, of course, gold. And few market participants expect regime change more than gold bugs and bitcoin bros. Paired with the rapid decline in the U.S. dollar, the extreme end of this group says the recent moves herald a reckoning of central bank monetary policy that marks the beginning of the end of American economic dominance.

Yes, it’s extreme, but just because an event is of low probability does not mean we should ignore when its odds increase. The odds are increasing. Every time the government fires off another bullet of nation-wide direct deposit, we wade deeper into the unknown. As Covid increasingly becomes a U.S. issue, markets may rightly question whether papering over our problems with the money-printer will jeopardize our position next to other economies that are rebounding faster. What’s important to realize in the world of Modern Monetary Theory is that it’s not just the bitcoin bros who are embracing the fringe; it’s also those who portray this as business as usual or purport to have a good grasp of the outcome. The authority to print is a virtue of strength – effectively, a permitted abuse of power. That requires constant reassessment of America’s economic position on the world stage. It behooves us then, to move as slow as possible.

Gold bugs giddy for the dollar’s demise as the world’s reserve currency will one day be right, but the collapse they’re looking for is far from obviously imminent. Sure as the sun will one day burn out, something will replace the dollar. But should we fret over it now?

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What’s more likely, per usual, is an outcome in between. The breakouts in gold, silver and bitcoin actually fit well with the rotation underway within the stock market, as small-caps outperform the Nasdaq and cyclical stocks peer their head back above water. These are companies that need the economic recovery to pick up steam. Reflation is the first step toward inflation, so their gains do make sense next to the interest in gold, which some investors buy as a hedge against inflation.

The metals move is striking, but fits into a near-term positive case for the global recovery that is also being expressed underneath the surface of the stock market. Factoring in the dollar’s role as a safety haven during the crisis, its decline also adds credence to the incoming regime shift as a positive one, at least in the near-term. The details of where the growth comes from — abroad or domestic — and how quickly the growth arrives, will determine which assets perform best, and just how much the status quote changes.

If the pickup in demand is powerful enough to generate the inflation gold bugs are looking for, there will be major volatility in markets. Bonds would join in the dollar’s descent, and expensive growth stocks would be in trouble. But before big inflation, we need a little bit, and that will be more about rotation than destruction.

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