The Equity-Gold Price Conundrum, Part 2: The Great Inflation

The comments below are an edited and abridged synopsis of an article by GoldMoney Insights

Equity markets have rallied over the past year, pushing valuations to extreme levels, and this report analyzes the two common arguments made by equity bulls (this time is different/current valuations are justified). GoldMoney finds that markets are mispricing gold or equities, as either of these arguments implies that gold should outperform stocks.

The Equity-Gold Price Conundrum, Part 2: The Great Inflation | BullionBuzz | Nick's Top Six
Inflation spelled in letters with shopping basket and piggy bank on seesaw against dark background

The 2-part report analyzes the dichotomy between current equity prices, which by conventional valuation metrics look extremely overvalued, and gold. In the first part of the report, two common arguments put forward by the equity bulls on why these valuations are justified were examined:

1. The Great Gatsby: The pandemic, as negative as it was for economic activity near term, will be followed by a period of unprecedented economic expansion. Hence, the GDP will rapidly rise and close the gap to equity prices; and

2. The great inflation: Stocks simply price in future inflation that will eventually come on the back of decades of ultra-low rates and central bank balance sheet expansion.

In summary:

“We find the Great Gatsby scenario of an explosion in real economic growth over the coming years implausible, unless it is on the back of huge infrastructure spending, entirely financed through an unprecedented expansion in debt. However, such a debt expansion would favour gold over stocks.”

“We find the great inflation scenario is plausible, but in this scenario too, we expect gold to outperform stocks.”

“Should neither scenario occur, then stocks are due for a significant correction. This would ultimately again force the Fed to intervene, which would also favour gold (however, the initial correction in equities may also negatively affect gold prices, but much less so, and only for a brief period).”

Conclusion: The authors expect gold to outperform stocks over the next few years.

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