Gold is Signaling a Tectonic Shift in the Financial System
Graham Summers, MBA

It’s time to talk about gold as an investment.

The precious metal has recently grabbed headlines because it has rallied from $2,300 per ounce to ~$3,500 per ounce. The chart is quite impressive with gold rising nearly every month for over a year.

“So, what,” many investors would respond. “a rally from $2,300 to $3,200 means gold has gained just ~40% during the course of a year and a half many tech plays can rally that much in a matter of months!”

This kind of thinking is common.

Gold is the Rodney Dangerfield of the investment world: it gets very little respect. Warren Buffett once famously stated that gold doesn’t do anything “but look at you.” Buffett meant that as an investment, gold had little value because it doesn’t generate cash flow, not does it pay a dividend.

Those statements are both true. But gold also doesn’t miss quarterly estimates and collapse 30% in a week (Meta, Target, and numerous other $100+ billion companies have done that).

Similarly, Gold doesn’t “cook the books” and defraud its investors (Enron, Worldcom, Lehman Brothers, etc.). It doesn’t announce stupid mergers that offer little if any real value (eBay buying Skype, AOL and Time Warner, Yahoo and Geocities). And gold doesn’t go out of business or go bankrupt (Lehman Brothers, AIG, Borders, Blockbuster, etc.).

Moreover, despite all the hate, gold has actually been one of the greatest investments of the last 60 years. It’s even CRUSHED stocks.

That is not a typo.

Since mid-1967, gold has outperformed the S&P 500 and the Dow Jones Industrial Average by WIDE margins. During that time period, gold has risen over 8,300% while the S&P 500 has risen 6,600%.

See for yourself.

Why do I pick 1967 as the start date for this comparison?

Because gold was pegged to global currencies up until mid-1967 when France became the first member of Bretton Woods to end the gold standard completely. Other countries subsequently followed suit with the U.S. formally abandoning its own gold peg in August 1971.

Put simply, up until mid-1967, gold was NOT a free-floating asset class like stocks. So, comparing its performance as an investment to that of stocks prior to 1967 is simply bad analysis.

Once gold was no longer pegged to currencies, and became a truly free-floating investment, it TROUNCED stocks for decades on end. Indeed, from 1967 through today, the only times stocks outperformed gold was during the Tech bubble and the pandemic bubble: the most egregious stock market bubbles of the last 100 years.

Put simply, as an asset class, gold has proven to be one of the greatest investments in history. True, some stocks have completely obliterated gold’s performance. But stocks as a whole, have trailed gold.

Why is this?

The below chart. Gold may not pay a dividend or generate cash flow, but it does maintain purchasing power. And if there's one thing the Fed has accomplished since it was given control of the U.S. Dollar in 1913, it's devaluing the currency.

Put simply, there is ALWAYS a case to be made for owning gold. Unless the Fed finally gets "religion" about the USD and stops devaluing the currency, gold will perform well in the very long term.

Remember, we are talking in terms of decades here, not months or years. There are periods of time in which gold goes nowhere in nominal terms for years on end.

I've illustrated some of those time periods in the chart below.

They are:

1980-2004
2012-2020

However, gold more than makes up for these periods when it does catch a bid as it usually runs hundreds of percentage points in a matter of a few years.

During the bull market of the 1970s, gold ran nearly 400% before spending the better part of four years in the doldrums. It then erupted higher by 1,400% in the span of a few years for total bull market gains of nearly 2,000%.

The bull market of the 2000s was much smaller in nature with gold gaining only 500%. However, it's worth noting that this was a period of disinflation, NOT inflation. Moreover, gold trounced stocks (blue line) during this time period.

Which brings us to today.

Gold has recently signaled a tectonic shift by breaking out to the upside against every major currency.

This is a major “signal” from the financial system. It’s one thing for gold to break out against the $USD, but to see it break out against the Euro, Yen and even the Swiss Franc is of systemic import.

What does this mean?

Gold has figured out that there is no path forward for policymakers that doesn’t involve currency debasement.

The world is awash in debt. In the U.S. alone there is over $14 trillion in corporate debt, $20 trillion in household debt, and $37 trillion in public debt.

Now there are three ways to deal with excessive debt.

1. Pay if off/ grow out of it.

2. Default/ restructure it.

3. Inflate it away through currency debasement.

Let’s be honest here, #1 is not possible for the U.S. (or the rest of the world). There is simply too much debt. This leaves option #2, which would trigger a crisis that would make 2008 look like a picnic OR option #3.

Which one do you think central banks and governments will choose?

Correct, they will choose option #3: to inflate it away.

THIS is what gold is forecasting: that there is no path forward from a macro-economic policy perspective that doesn’t involve more stimulus/ money printing.

Consider the U.S. where the Trump administration has abandoned any pretense of austerity courtesy of the Department of Government Efficiency (DOGE). The deficit is 6% of GDP. To put that into perspective, it exceeds the deficit the U.S. ran during every major recession in the last 100 years except the Great Financial Crisis of 2008! And this is while the economy is still growing!

What happens when the economy finally rolls over… a deficit equal to 8%, 10%, or 12% of GDP? This would mean the U.S. hitting $40 trillion or even $45 trillion in debt in a matter of a few years’ time! Can you imagine the impact that would have on the $USD?

Bear in mind, we’re focusing on the U.S., but the same issues are prevalent in every major economy: China, Japan, Europe, the United Kingdom, etc. This is why gold is breaking out against every major currency. It’s why gold is very likely in a new secular bull market. And it’s why smart investors are buying gold in anticipation of greater currency devaluation once policymakers turn the currency printing presses on again. Gold is signaling a tectonic shift is underway in the financial system. It would be wise to heed it!

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Graham Summers, MBA is Chief Market Strategist for Phoenix Capital Research, an investment research firm based in the Washington DC-metro area.

Graham’s sterling track record and history of major predictions has made him one of the most sought after investment analysts in the world. He is one of only 20 experts in the world who are on record as predicting the 2008 Crash. Since then he has accurately predicted the EU Meltdown of 2011-2012 (locking in 73 consecutive winners during this period), Gold’s rise to $2,000 per ounce (and subsequent collapse), China’s market crash and more.

His views on business and investing has been featured in RollingStone magazine, The New York Post, CNN Money, Crain’s New York Business, the National Review, Thomson Reuters, the Fox Business, and more. His commentary is regularly featured on ZeroHedge and other online investment outlets.

 

 

https://grahamsummersmba.substack.com/