You'll often see side-by-side charts for gold and stock yields across decades. Some periods will show a very strong correlation, where the two charts seem almost the same, but there are also stretches where gold seems to decouple from the other markets.
In truth, it makes no sense to compare the prices and yields of these two types of assets, and the seeming competition between them is no more than an illusion.
Unlike gold, stocks are heavily protected and supported by central banks. This is a strong argument in favor of investing in stocks, though you'll rarely see it stated so openly.
When the stock market is running smoothly, the sentiment across the economy stays positive. This, too, instills trust in the monetary authorities and in their policies.
Moreover, when stock prices rise, it creates an income effect that benefits the government. Former Fed Chair Alan Greenspan once calculated that a 10% increase in S&P 500 leads to a 1% increase in the US GDP. He also pointed out that stock market growth brings in more taxes and helps reduce the budget deficit.
Ever since the 2008 financial crisis, central banks have been pouring money into the economy. The key reason why stock prices skyrocketed in recent years is that financial markets have been pumped full of liquidity. All this money wants to be invested for maximum returns, and the stock market gives investors this opportunity – or at least this is the common opinion.
But what is happening in the real economy? Since 2009, the US' GDP has grown from $14.3 trillion to $23.18 trillion, or by only 62%. In the same period, S&P 500 rose from 825 to 4,600, or by 557%. These two numbers show that the stock market has been surging not thanks to fast economic growth but simply because investors have been willing to put more and more money into it.
At the same time, M3 money supply in the US grew from $3.3 trillion to $20.9 trillion between January 2009 and October 2021. Gold prices have increased, too: one ounce was worth $870 in 2009, but by October 2021 it grew to $1,769. Thus, the USD price of gold increased by almost 100%. Meanwhile, the US CPI (Consumer Price Index) has risen by 30% since early 2009, according to official data.
We can see that gold and the stock market have remained uncorrelated in the past 12 years. This is because central banks do everything they can to prevent a gold rally and to keep stocks growing.
Under these conditions, gold becomes a hedging asset – an insurance policy, if you will – rather than an investment. Because at some point you have to start thinking about capital preservation, not capital growth. You have to think of what will be left once the money that has been pumped into the stock market starts to be taken out of the system. Nobody knows how violently the bubble will burst – but physical gold won't go anywhere. So smart investors should hold at least some gold for the long terms, if only for the sake of diversification.
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The key reason why stock prices skyrocketed in recent years is that financial markets have been pumped full of liquidity.
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