What is Gold Trying to Tell Us?

What is Gold Trying to Tell Us?

by Michael Batnick, The Irrelevant Investor

After a four and a half year bear market which saw the value of  gold fall by 45%, the precious metal enthusiasts finally have something to smile about. Gold is up over nine percent in February, its best month since January 2012. We’re always told that gold is a safe haven, so I wanted to see if these type of rallies have provided any signal, one way or the other, as to how stocks have performed going forward.

February is the 36th month (since 1970) that gold has rallied at least nine percent. Right off the bat, it’s obvious we’re dealing with a very small sample. Be that as it may, the performance of stocks one, six and twelve months later was indistinguishable from any other period.

We also hear that gold does well when inflation picks up. This probably has a lot to do with the fact that gold rose over 1,300% in the 1970s, a period where inflation turned positive nominal returns for stocks and bonds into negative real returns.

In the chart below, we see all the months where gold rose nine percent (red dots). You’ll notice that 15 out of these 35 months came in the 1970s, as inflation was on the rise. You’ll also notice however, there were a number of occasions that gold performed well as inflation was coming down. There were seven months (this will be the eighth) where gold rallied nine percent occurred when CPI was under three percent.

Because gold has no earnings or dividends, its intrinsic value is impossible to calculate. For these reasons, gold is an investment that is very susceptible to false narratives. Despite what we might hear, the price of gold tells us nothing about the future direction of stocks.

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