The usual and newly minted crypto souls are back on the various financial media and websites preaching that once again the “shiny rock” is no longer a sufficient hedge against inflation and that the economic data plus bright future ahead means there is no reason to own hard assets.
This theory could not be further from the truth.
Would this author recommend having 100% of an individual’s assets in the old antiquated monetary metals of gold and silver? Never, but it is worthy considering a safety hedge in physical, not paper precious metals as part of one’s portfolio. More on that at the end of this review as when one reviews the trading in gold over the last month of the year during great periods of economic and political turmoil, a familiar pattern emerges.
Is it truly “different this time” as many preach and would have the masses believe?
Let’s review the past to potentially provide a short term guide into the future.
I. December 1980
The turmoil created by Volcker’s folly by cutting rates during the summer led to an inflationary surge at the end of the year which skyrocketed in the autumn to finally peak in 1981. Gold behaved in December in a pattern some questioned as it was expected to follow the path of inflation:
It was in December that the markets re-evaluated that Fed Chair Volcker was serious about fighting inflation and maintaining higher interest rates for a prolonged period which then inspired the decline from gold’s all time highs.
II. December 1987
The hangover from the 1987 October crash and surge in financial aid from Greenspan gave gold a short term boost as there were still great concerns about a repeat of 1929.
In 1988, the selling continued as the first Greenspan “put” was noted as providing stability to the equity markets and economy.
III. December 1990
The Gulf War Recession starting in July of 1990 was blamed by the media both financial and mainstream on the surge in oil prices due to the Gulf War but in reality there was a building sense a recession was coming before the Iraqi invasion of Kuwait. The realization that the economy was slowing down after the monetary intervention by the Fed after the 1987 Great Stock Market Crash was only exacerbated by the conflict.
After the month end rally in December the end of the recession was in sight and the Clinton administration was believed to come into office with massive fiscal stimulus to end the economy’s malaise. The reality was that new technology was on the horizon which would create the boom that lasted until the end of the century.
IV. December 1998
The LTCM disaster spooked markets back into what diving head first into precious metals as the belief was that Russia’s economic collapse would create problems in emerging markets around the world. Thus the traditional safe haven of gold performed as expected as the crisis and solution created by the Fed were engaged.
V. December 2000
The .com crash had been ongoing for over 8 months by this time and the instability created by a divisive and insane US Presidential election only added to the belief that a long term bottom was in place for gold and its safety trade status renewed.
Once the Supreme Court ruled on the recount insanity and some degree of stability restored to the US political system, the second wave of selling in December began as a recession may have well been underway already, albeit not recognized by the NBER.
VI. December 2008
If it were not for the severity of the Great Financial Crisis, odds are the only people selling gold would have been those in the financial industry desperate for liquidity. Yet the bounce back at the end of December 2008 was reflective of the true panic and potential for a complete collapse of the US financial system creating the uncertainty necessary for the rally to resume just before Christmas.
VII. December 2018
While most of America slumbered, the seeds of another major liquidity crisis were becoming obvious to Wall Street and a belief that the bailouts conducted in 2009, 2012, and 2013 were starting to unravel.
As markets started to crash and burn after Thanksgiving of 2018, gold resumed its traditional role of providing a respite from the storm.
This was the most glaring counter trend move into year end for the precious metal as even into December 31st, there was still some uncertainty that the new Fed Chair, Jay Powell, had the mettle to guide the financial system through this crisis. As history now illustrates his willingness to engage in QE forever brought the phrase “Powell Put” into America’s financial vocabulary.
VIII. December 2024 and Beyond
And now, another great financial reckoning might well be on America’s horizon. Thus far, gold has been acting as a safety trade even after retreating from its high watermark above $2800 per ounce this autumn.
Now the question heading into 2025 becomes apparent once again:
After cutting rates this week will the Fed hold tight or is the Powell Put alive and well?
In early 2025, the world will probably endure more geopolitical turmoil before the policies of the Trump administration begin to take effect. Add that problem to the realization that the economic data for the prior 12-18 months will probably be revised to reality dramatically reflecting the impacts of an inflationary plateau at higher levels than normal.
In the end, it looks like the Federal Reserve blundered under Jay Powell much like Paul Volcker did in 1980. The end result will have to be either a massive tightening while a recession is finally recognized by economists or an allowance for a loose and free monetary policy which will create more stagflation versus stability.
Gold however will still be there, that pesky shiny rock that can not disappear with an internet outage blocking one’s equity trade or vanish into the ether like a Fartcoin.
Prepare for impact accordingly.
Views: 85
I love how bitcoin is symbolized by the symbol of a gold coin. It's so adorable.
Yeah, that won’t work well in a stagflationary scenario.