It’s one of the peculiarities of the world that rising oil and gold prices are contrary indicators for the economy, but that correlation is pretty long-standing. The strange part about this particular signal is that it’s flashing at a time the Dow and S&P 500 are making new highs.
It’s useful to look at why gold and oil prices are on the increase, but the reasons aren’t pretty. Commodity prices are going up for the same reason they started going down in late 2011; they’re inverse to the true state of our economy. Gold and oil prices started a years-long downward trend when the economy picked up steam post-Recession and the dollar gained ground against other world currencies. The next three years were great for the dollar and the stock market, less so for commodities.
Looking back at history we see similar examples. In the early 1970s, for example, gold was trading for $35 an ounce. By the start of the 1980s that figure had reached $800. The 1970s were tumultuous years, bringing us the fall of Saigon, the Arab oil embargo, insanely high inflation, a surge in interest rates and the Iran hostage crisis. The 1970s were also when President Nixon cut the dollar’s last links to gold. All of that served to generate a huge amount of uncertainty in the market. Things calmed down in the 1980s; the market recovered and gold prices rolled back to a relatively steady state.
Gold and Oil: Red Flags We Can’t Afford to Ignore
Historically it hasn’t been good news for the broader economy when gold and oil prices start going up, and that’s what we’re seeing today. What’s different currently is that the stock market isn’t playing along…yet.But with unrest domestically, including a brutal election ahead, and an array of worldwide crises and bad policy decisions dominating the international economic picture,the balance seems tipped in favor of gold and oil moving still higher.
Central Banks Not Helping
Central banks are engaged in an ongoing global race to dilute their own currencies; one they hope will help their nations undercut other countries when it comes to trade. The problem? They’re all doing it, which means no country can establish a lasting edge; meanwhile everyone’s currency becomes more volatile.
As if this weren’t bad enough, the proliferation of negative interest rates in the European Union, Japan, Switzerland and more are destabilizing the world economy and having a disastrous impact on institutional investors managing pension and insurance funds. The Fed hasn’t waded into the negative interest rate quagmire, but Janet Yellen refuses to definitively rule them out. Meanwhile, the Fed has kept the cheap money flowing, and the rise in gold prices is indicative of this weakness in U.S. currency policy.
The Real Casualty: Confidence
The worrisome thing about our lightning-fast new world economy is that there doesn’t need to be an overwhelming disaster for a financial crisis to develop. The recent failed coup in Turkey, a member of NATO, host to key U.S. air bases, and a nation which has long desired to enter in the EU, is an example of how quickly money-destroying uncertainty can be introduced into our global economy.
Other major points of uncertainty include Brexit, and the future of the European Union and its euro, a currency used by almost 340 million people every day; not to mention its role as a reserve currency in international trade. As grinding uncertainty continues to mount, the less faith people can afford to have in their paper currency, including the U.S. dollar, which—again—means continued upward pressure on gold and oil prices.
There’s an old saying in the stock market that you can’t fight the tape. Today the tape is gone, but the sentiment remains. We’re likely looking at an extended period of uncertainty, two plus years at a minimum. We’ve seen what uncertainty can do in markets, and to individual investors, and it’s best not to be on the wrong side of that trade in the days ahead.