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Gold Performance in the Era of Constant Intervention

One of the games financial analysts play is to compare the return on different investments in order to make their case for one investment over the other.  Because all markets fluctuate, it allows the innovative analyst to pick periods of time that will reflect favorably upon whatever they happen to be promoting.

This is also done by advocates of gold and those opposed to gold so there is equality in chicanery.
time cover
We think a better way, that is not so arbitrary, is to start the research when something profoundly changes, and examine that period until something comes along that fundamentally changes again.

We can’t think of anything more profound than the move to suppress interest rates.  This has pushed interest rates down to levels never seen before in history and we have history going back to the pottery chards of Mesopotamia.  This has had profound implications for the valuation of all markets.

This fundamental change we have seen in the past 20 years has taken the form of constant Central Bank intervention and monetary experimentation that began in the late 1990s, and has continued in various forms until the present. Some was to provide emergency liquidity but much of the policy was to deliberately push interest rates down to relieve the pressure on debtors of various kinds.

Since just before the turn of the century, we had several responses to a series of debt crisis: the emerging market( Russian default) and Asian currency crisis of 1998 that created the Time cover story of the “committee to save the world”, to the Dot-Com bubble burst in 2000, the response to 9/11, the housing crisis and debt crisis of 2008-2009, a series of four Quantitative Easing’s, interest rate suppression, and right up to today, the non QE expansion of the Fed’s balance sheet due to the crisis in the repo market.

We have had markets dominated by “Maestro”, the Greenspan Era where it was felt central banks could coordinate world markets on par with how a conductor can direct an orchestra. Along with this came the “Greenspan Put”, the notion that the FED will not let the stock market meltdown.  We had the period of Ben Bernanke and his “helicopter money.”  Janet Yellen came along to continue the basic policy and now Jerome Powell, who talks the game of normalizing interest rates only to quickly retreat after the December 2018 meltdown in the stock market.

This monetary experimentation is not limited to the United States.  Almost all central banks, especially the Japanese, the EU, England, and China; have pursued their own version of hyper central bank activism.

So, we think there is a good case to start our examination by returning to when this world wide trend began and we think 1998 is a fair place to start.  You could counter that we ourselves are cherry picking, since gold was depressed at this point in history.  But remember, we are picking the year because that was when things started to change in a fundamental way and all markets, not just gold, have been heavily influenced.  Gold itself did not really start moving until three years after the crisis began.

The Russian Ruble devaluation was in August of 1998, but the Thai Baht currency crisis that started the Asian Contagion occurred about a year earlier.  Then the full weight of the IMF and US intervention came afterwards to address the crisis, mostly in 1998.  The Time cover is from February of 1999.  Long Term Capital Management, a massive $126 billion hedge fund also needed rescuing from failure in 1998.

So, 1998 seems to be a pivotal year of immense importance.  The world needed to be saved. Little ink is spilled over what were the causative forces that made preventing a financial meltdown necessary. And since we don’t have the time to discuss causation, all we can say is that new policies were adopted that would have long term consequences.  How did markets react to this change?

Dec 2019 chart 1

Even after a very slow start, and a five-year bear market from 2011-2016, gold has advanced 405% over this 22-year period.

Dec 2019 chart 2

Silver has not done as well, but still came in with a gain of 178%.

Dec 2019 chart 3

Stocks, as represented by the S&P is up almost 223%.

Dec 2019 chart 4

Above we show the performance of the Vanguard Intermediate Bond Index, a decent proxy for what most bond holders would have experienced.  Given the historic decline in rates, it is no surprise it has returned a whopping 225%, getting within about 25% of the return on equities, with considerably less risk, over the same period.

Thus, in the recent 22 years of frenetic and constant Central Bank intervention, gold has been by far the best performing asset class.  And gold is leading not by just a little, but by quite a lot.

Why?  How could a sterile metal outperform the most vibrant stock market in the world during a period of such immense technological change?  And, we should add, gold beat equities despite stocks experiencing the longest bull market in US economic history.

How could it outperform the highest quality bonds, in the best bond environment possible, prolonged plunging rates?

That is a very difficult question to answer and we are not sure anyone really knows.  But we think what lies at the root of all these interventions, is that the overall effect has been the depreciation of the value of money worldwide.

Unfortunately, we see no end in sight to constant intervention and investors should bear that in mind.  Government has become habituated to intervention, and emboldened by it, and in turn, the markets now expect it. We will likely see many more “committees to save the world.”

There are sound historical reasons for making gold a prominent part of your overall portfolio.

We are not suggesting in all time periods to be measured, gold is the top performing asset.  But clearly, since the Grand Monetary Experiment began in the late 1990s, gold has responded extremely well.

Charts courtesy of Stockcharts. Com. Information is derived from sources believed reliable but investment results cannot be guaranteed.

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