What does it say when professional investors who have earned $ billions on Wall Street have moved out of stocks and into gold and/or US Treasuries? Famed investor Michael Burry, who was the first to identify and profit from the market collapse during the Great Recession of 2007-8, has recently allocated over 7% of his portfolio to gold.
Meanwhile, Warren Buffett is currently sitting on the sidelines, with a record $277 billion in cash and treasuries. They must be seeing or sensing upcoming conditions that bring stocks down and precious metals up. I believe both suppositions are correct; today we will discuss why.
Shipping costs have tripled so far in 2024 (chart above), which is driving inflation back up here in the United States. The rate of inflation as measured by the CPI had been decreasing until June, when it started to increase once again (chart below). If history is any guide, the next bout of inflation could be more hard-hitting and longer-lasting than the previous one. At the same time, real wages have declined compared to the level of cost increases. All signs are pointing to recession. Recession + inflation = stagflation, which is an environment that fosters higher gold and silver prices.
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The FED Pivot
Meanwhile, stocks may not fare so well - for several reasons. The signs of recession are increasing, as the pace of corporate layoffs intensifies in 2024. Upwards of 92% of American employers have/are projecting layoffs sometime this year. Americans have been increasing personal debt levels, as a way to continue making purchases during a period of rising prices and stagnant wages.
Increased debt puts downward pressure on spending, and upward pressure on corporate bankruptcy levels. The Federal Reserve will need to lower interest rates, with timing being the only uncertainty. Some eminent economists are calling for significant cuts immediately, while others suggest they may wait until after the election for political reasons. It is often following the first interest rate cuts that the stock market loses significant value, from 27-58% (see graphic below).
Every time that sentiment about future interest rate cuts has reached this level (9 times in the last 60+ years) a recession followed. This time should be no exception. It makes sense if we acknowledge that the Federal Reserve is often late in responding to financial crises; including crises of it’s own making. With the economy already slowing down, we may already be in recession before or shortly after the FED reduces interest rates. This would fit the normal pattern of downturns, looking back over the last 60 years (below).
Geopolitical Tensions
With Hezbollah dropping missiles on Israel, and Ukraine invading Russia through the Kursk corridor, both conflicts seem to be dragging us closer to world war rather than world peace. In the past, times of turmoil have been a magnet for US financial markets and assets, but today the geopolitical magnet seems to be pulling resources towards gold instead. Central banks have been acquiring gold at a heightened pace for 2 years now, setting new records for the amount of increased gold exposure they are securing for themselves. This puts downward pressure on the usage and value of the dollar, as nations diversify both reserves and trading assets away from the dollar, and towards regional currencies and gold.
The Stochastic Relative Strength Index
There is a technical analysis indicator called the “Stochastic Relative Strength Index”, or Stoch RSI for short, which is a measurement of how oversold or overbought an investment is. The Stoch RSI for gold appears to be crossing above an important threshold of 50, that it has crossed 2 times before (1972 and 2002). After crossing this threshold in 2002, gold increased 450% in price. The previous time (1972), it increased in price by over 1800%. If we average the performance based on these 2 examples, we could see gold increase 1,125% from here. This would put gold at over $27,000 an ounce in the coming years. While that sounds surreal, even a fraction of that performance would be impressive, given the current economic and geopolitical conditions.
Following the Experts
Even if you were to ignore every argument and chart included in this article, there are two important issues that we must remember. We began this discussion by talking about the investment decisions being made by wealthy investment professionals Michael Burry, and Warren Buffett. Michael famously earned $100 million for himself and $700 million for investors in his fund in a single year during the Great Recession. For long-term outperformance, it is hard to beat the record of Warren Buffett. Those investing $10,000 in his fund (Berkshire Hathaway) in 1965, would have over $378 million by 2022. Meanwhile an investor in the S&P 500 index would have only $2.5 million over the same period.
I don’t know about you, but my investing prowess has never netted me $100 million in a year, nor have I bested the S&P 500 so dramatically for over 57 years. That is an average return of 18.64% per year, for 57 years; impressive by any measure. Perhaps it is safe to say that these guys know a thing or two about avoiding losses, and making money. Why would a guy who has averaged over 18% per year go to cash, and settle for 4.5% per year? I believe that he believes it is better to earn 4.5% than to lose 30%. Not only that, but he is looking at making further purchases in the future, after the market has dropped 27-58% from current levels (if history is any guide).
On the other side of the coin, I believe Michael Burry sees an opportunity not only to avoid losses but also to make incredible gains throughout the downturn, by owning gold. Somewhere between 450-1800% on the price of gold would earn Mr Burry another nice paycheck, even besting his $100 million haul from the housing crisis. Unlike Mr Burry, I don’t have $21 million allocated to gold. But by allocating 7-10% of what we do have available to gold, we can duplicate the experience in terms of future returns, and asset protection. That, I can do - and have already done. Have you?
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byBill Stack