A Weak Economy Remains Gold’s Best Friend

It was Bob Prechter of Elliott Wave fame, likely among others, who noted that correlations between all asset classes are quite strong during a Depression. This is true in a cyclical sense but not in a structural sense. Stocks tumbled in the 1929-1941 period while commodities, led by gold and gold producers, increased in value. We’ve experienced similar phenomena in the past 12 years. Cyclically, there has been a correlation between these asset classes. Structurally, stocks have been in a bear market and resource sector has been in a bull market. The driving force has been a weak economy and bear market which usually leads to more inflationary policy, which in turn benefits the resource sector. Are we soon to see a replay of this scenario?

Despite unprecedented monetary inflation, stimulus and bailouts, the economy has barely recovered. The chart below (fromDougShort) displays post-war real GDP growth. The black line shows the 10-year average which has been in a steep decline since 2006. At the time, the Bush II recovery was the weakest on record. It has been surpassed by a pathetically weak recovery (statistically) under Obama. The growth rate in each of the past seven quarters has been below the 10-year moving average.

 

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