With the Dow Jones Industrial Average having reached a new record high last week, breaking the 30,000-point barrier for the first time ever, many news headlines proclaimed the end of the market’s COVID fears. The stock market’s pandemic panic was now over, and investors can look forward to continued growth in the future. But is that really the case?
At the same time stock markets were pushing higher, the gold price dropped to around $1,800. While that’s still far higher than it was at the beginning of 2020, it’s nonetheless disappointing for those expecting gold to continue rising in price. Stock market bulls are crowing that this means the end of gold’s bull market, but is that true?
The reality is that the Dow hitting 30,000 isn’t nearly as good a sign for stock markets as it is for gold. Here are 3 reasons why.
1. Stock Market Euphoria in Overdrive
There’s no denying that stocks have been overvalued for years. Whether analyzing stocks according to price to equity ratios, price to sales ratios, or other ratios, those ratios have been sky-high and climbing. And with a slowing economy and falling sales in the forecast for 2021, those ratios will likely continue to climb.
Much of the euphoria surrounding stock markets has been driven by hype rather than substance. Hopes for a COVID vaccine, or for an end to the trade war with China, or for more fiscal and monetary stimulus, have been the instigators behind various stock market moves. Markets are trying to price in the positive effects ahead of time, but they’ll inevitably be disappointed when none of their hopes come to fruition.
Then there’s the fact that markets are being driven in large part by a handful of major stocks. The S&P 500, for instance, is growing on the backs of Microsoft, Apple, Amazon, Google, and Facebook, with most other companies in the index flat or down for the year.
We’re in the middle of what many analysts are terming a market meltup, reminiscent of the final phase of the dotcom bubble. And like any other bubble, those who bought near the top will be left holding the bag when the bubble collapses.
2. The Economy Is Still Weak
There are still millions of Americans out of work, and with governors around the country ordering restaurants, gyms, and other retail establishments to curtail operations or shut down completely, the labor situation won’t get better anytime soon. The impact that will have on US production could also be significant.
Initial estimates of US GDP in the 3rd quarter indicate that the US economy grew 33.1% in the third quarter, versus a decline of 31.4% in the second quarter. But that still means that US GDP in the third quarter is nearly 9% lower than it was in the first quarter, which was already lower than the fourth quarter of 2019.
While that means that the US might not technically be in recession, since GDP increased in the third quarter, it can’t be touted as a recovery by any means. With further lockdowns on the way, it’s very likely that the coming quarters won’t show any growth either. Even if there were growth, it would require growth of over 10% to get the economy to increase over its first quarter sums, which were itself lower than the fourth quarter of 2019. In short, the US economy is going to be in the doldrums for some time to come.
That further belies the positive attitude of stock markets. We’ve seen a massive decrease in economic growth this year, yet stock markets are still hitting record highs? That boggles the mind and beggars belief. Stock markets have always been lagging indicators of recessions, but what’s happening today is more unusual than ever. We have an economy that will probably end the year with 10-15% lower growth than the year before, yet stock markets are just shrugging it off.
That obviously can’t continue forever, as at some point reality will set in. There are only so many retail investors who can enter the market, convinced that stocks will head to the moon. Once that supply of suckers runs dry, and it eventually will, stocks will fall back to earth. How far will they fall? It’s hard to say, but with an economy that has already fallen further than in 2008, don’t be surprised to see stocks fall at least the 55% they did during the 2008 crisis, if not further.
3. Prospect for Future Stimulus
Right now markets have been buoyed in large part by the Federal Reserve’s monetary stimulus. That stimulus monetized the massive spending from the COVID relief bills passed by Congress, and was almost necessary in order to prevent a tsunami of new Treasury debt from flooding world debt markets and wreaking havoc on bond yields.
The effects of that stimulus sent stock markets on a tear, but they affected gold markets as well. Gold’s price rise was due both to new money flooding the market and allowing many investors to purchase gold, as well as due to the signal that stimulus gave that markets were weak. Whenever markets show signs of weakness, investors flock to gold.
With future stimulus seeming to be a certainty, the only thing that has to be hashed out is the size of the stimulus. Along with monetary stimulus from the Fed, there’s a high likelihood of fiscal stimulus from Congress too. And just like previous stimulus packages, future stimulus should provide a boost to the gold price.
Which Way Will Gold Go in 2021?
Even the most bullish gold investors can feel uneasy about the gold price falling, particularly when all the signs seem to indicate that gold should be increasing. But it’s important to remember that investing in gold isn’t like investing in stocks. Many investors today hold onto stocks for months, not years. They’re looking to benefit from short-term price rises, cash out, then look for new opportunities. But gold isn’t a get rich quick scheme, it’s part of a long-term investment plan to build and protect your wealth over the long term.
With the outlook for the economy looking bleak over the next few years, particularly given the potential for higher taxes, higher spending, and more regulations under a Biden administration, demand for gold should increase from investors looking to protect their assets. That should result in an increase in the gold price, as investors continue to flock to the yellow metal in the face of a worsening economy.
For investors with retirement assets in tax-advantaged accounts, they can take advantage of the availability of a gold IRA to protect their retirement savings. With a gold IRA, investors can roll over or transfer assets from existing tax-advantaged retirement accounts such as a 401(k), 403(b), IRA, TSP, or similar account into an investment in gold. A gold IRA allows investors to invest in physical gold coins or bars while still enjoying all the same tax advantages as their current retirement accounts.
If you understand the headwinds facing the economy today and realize that your retirement savings are at risk, you may want to think about protecting them with an investment in gold. With stock markets overdue for a major crash, and gold poised for a major bull run, why not invest in gold today? Call Goldco to find out how your retirement savings can benefit from an investment in gold.