NOTE TO READERS: “Global Credit Collapse Is Deflationary” was originally published as an exclusive for TalkMarkets on October 29, 2024. I have not changed anything in the article, nor is there any reason to modify or alter what is written below because of U.S. election results.
stocks
Gold, Oil, Wheat, & Stocks Since 2020
GOLD, OIL, WHEAT, STOCKS
Financially speaking, the markets have been all over the map in the past four years since the onset of Covid and the self-inflicted wounds from forced economic shutdown. I went back to August 2020, five months after the festivities began, and pulled up some charts which show the price action since then for gold (money), wheat (food), crude oil (energy), and stocks (S&P 500). I will make some comments after each chart and provide observations at the end of the article. We’ll start with gold…
Gold Prices (August 2020-April 2024)
Peak prices for gold reached in August 2020 at or near $2000 oz. were not exceeded until late last year, more than three years later. Currently, gold is up about eighteen percent from its average closing price ($1971) in August 2020. At one point, in October 2022, the gold price was down by a similar amount and percentage.
Oil Prices (August 2020-April 2024)
Since August 2020, the price for a barrel of crude oil has risen sharply from $51 to a current price of $83; an increase of sixty-two percent. Almost two years ago, though, the price was at $114. There has been a decline of twenty-seven percent since then.
Wheat Prices (August 2020-April 2024)
The price of wheat soared from $5 per bushel to $12 (up 140%) in barely a year and one-half; then collapsed by almost sixty percent. Currently, at about $6 per bushel, wheat is up twenty percent since August 2020.
S&P 500 Index (August 2020-April 2024)
The S&P 500 stock index has risen by forty-four percent, increasing from 3500 to 5048. At one point in 2022, stocks had dropped one-third in price almost wiping out previous gains after August 2020. The relentless move higher afterward is quite impressive, regardless of fundamentals or logic to the contrary.
THOUGHTS AND OBSERVATIONS
By late 2020, most markets had risen quite assertively from their Covid-induced lows. There was no let-up in sight, though. Oil, wheat, and stocks continued their runs upward without hesitation. Gold refused to join the party and the others soon topped out and followed suit with all of them dropping for most of 2022 as higher interest rates took their toll on the markets.
Beginning in late 2022, rumors, hints, and speculation about the possibility of a Fed pivot sent stocks and gold higher. Wheat and oil prices continued lower for the time being.
At this point, wheat is the biggest loser, down fifty percent from its peak in February 2022, net of its recent rebound from the $5 level. That seems somewhat surprising. The effects of inflation have shown up in higher prices for goods and services, especially food and groceries. It seems reasonable that a healthy portion of the earlier wheat price increase was attributable to the effects of inflation. Supply chain disruptions likely accounted for much of the balance. So, why the sharp reversal and decline in the wheat price afterward? I don’t see evidence that food prices are coming down. Are wheat speculators deflationists?
The descent in oil prices was arrested last October when Palestinian militants attacked southern Israel from the Gaza Strip. Iran has shown its cards, too. As long as tensions remain high in the Mid-East, oil prices will be more vulnerable to upside shocks. But the downside could be just as shocking, depending on the circumstances. We saw an example of that with the economic shutdown during Covid. Without further escalation of fighting which could disrupt oil supplies and deliveries, might oil prices be much lower right now, along with wheat prices?
The rising cost of money (higher interest rates) has had observably negative effects on the financial markets. Higher prices for stocks seem more anticipatory of the beneficial effects of lower interest rates if/when they happen. It doesn’t seem reasonable that stock prices could keep making all-time highs while bond prices flirt with twenty-year lows and have been decimated by higher interest rates. The booze isn’t as cheap as before, but it is still available for now, apparently. That could change quickly. If it does, stock prices could drop faster and farther than bonds, or, anything else.
Gold has been the least volatile of the group. The increase in the gold price of eighteen percent doesn’t seem to warrant the enthusiasm that it is being accorded. Rather than cause for celebration, it is a merely a reflection of the most recent effects of inflation – the loss of purchasing power in the U.S. dollar that has occurred over the past four years. At $2338 oz. today, gold is still cheaper than its August 2020 inflation-adjusted price of $2375 ($1971). Gold’s price action is supportive evidence of its role as a long-term store of value.
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!
Stocks, Bitcoin, Gold – How Much Are They Worth?
STOCKS – BITCOIN – GOLD
Stock prices, according to the S&P 500, are up seventy percent from their lows last April. The Nasdaq Composite at its most recent high point was up even more, sporting a ninety-five percent increase from its nadir. A number of individual stocks have done even better.
For the entire year 2020, however, stocks were up a more modest sixteen percent (S&P 500) and only seven percent for the Dow Jones Industrial Average.
However, the outsized performance of the Nasdaq was even more apparent on a full calendar year basis. For 2020 the Nasdaq was up forty-three percent. Relative to its peers, the average Nasdaq stock was up more than three to four times as much as non-Nasdaq stocks.
Asset Price Crash Dead Ahead
An All-Asset Price Crash (AAPC) might be the next “Wow! Can you believe it?”
In the meantime, whether it be stocks, bonds, gold, or oil, investors are licking their chops and counting their profits before they are booked. And, they have reason to gloat. Let’s see what all the noise is about.
Gold And Stocks Headed Lower
GOLD AND STOCKS HEADED LOWER – NO CORRELATION
Gold and stocks are moving south together; but they are not correlated. Nor, are they inversely correlated, as some gold enthusiasts claim.
Reference to gold as a safe haven has some investors buying gold to hedge against a stock market crash. It is almost as if gold has become a pseudo defensive stock.
It seems investors actually expect gold’s price to go up when the stock market goes down; and vice-versa.
If that were the case, how do you explain the extended periods when both moved together; or the price action of gold relative to stocks in the past four days? Gold currently is lower in price than it was before stocks tumbled nearly 4000 points.
Stocks, Oil, Gold: Inflation-Adjusted Returns
STOCKS, OIL, GOLD…
In late 1999, the hyper-bullish technology stock sector was nearing the end of its nearly decade-long run to unsupportable and overly optimistic highs. At the center of the hype and fascination were new companies, headed by twenty-something geniuses. They were referred to as startups.
The multiples of earnings that normally applied in order to assess value of these companies was thrown aside. That is because most of them did not have any earnings.
Nevertheless, they were attractive enough to garner huge crowds of support. Just the hint of a revolutionary idea could boost an unknown small private company into the spotlight of the new issue market with over subscription being commonplace.
Technology stocks collapsed in 2000, and were eventually joined by the broader stock market which began a two-year descent that saw the S&P 500 lose fifty percent of its value.
Nearly smack in the middle of this two-year decline in stock prices came the 9/11 tragedy. Shortly after that the market bottomed, but before it could get untracked and head back up in earnest, there was a mutual fund “scandal”.
Then in 2006, real estate prices peaked – and cratered. Most of the damage was in residential real estate where it seemed to be the most extensive. It was definitely the most obvious.
Foreclosures were rampant and an entire cross-section of the population was in transit, moving from their recently acquired new homes and into rentals, if they could find one.
Economic fallout spread to major investment banks and the stock market. Financial institutions with household names like Lehman Brothers, Merrill Lynch, Washington Mutual, and AIG were skewered.
The stock market finally recognized how bad things were. Beginning in August 2007, and continuing for the next eighteen months, stock prices declined with a vengeance. The overall market, as reflected by the S&P 500, lost nearly two-thirds of its value.
In February 2009, a bottom was reached. The past ten years has seen the market surge to new all-time highs, seemingly much higher than could have possibly been anticipated just a few years ago.
The S&P 500 has increased in value four-fold from its low of 735 ten years ago to its most recent high of 2945.
It seems hard to believe, and it strengthens the argument for long-term investing in stocks and staying the course. But maybe things are not quite what they seem. Lets take a look.
Below is a chart (macrotrends.net) of the S&P 500 for the past twenty years. The data are inflation-adjusted using the headline CPI and plotted on a logarithmic scale… 
From this chart we can see that, in real terms, stocks did not get back to their highs of 2000 until fifteen years later, in February 2015. Even without the adjustment for inflation, stocks did not reach and exceed their 2000 peak until thirteen years later, in March 2013.
Also, we see that six of the past ten years were spent in recovering lost ground. The new highs and additional growth has come only in the past four years.
Fifteen years seems like an inordinately long time to wait for the market to assert itself and return to any expected pattern of normal growth. And you would have had to endure pure hell to see it happen.
And while the six and one-quarter percent average annual real rate of return over the past ten years is not inconsistent with the stock market’s long-term average annual return of about seven percent on an inflation-adjusted basis, it is too convenient to describe it as a return to normal.
A clearer picture of the stock market’s performance is found in looking farther back on the time line. The stock market’s (S&P 500) total return for the nineteen years beginning in January 2000 and ending in December 2018 is about fourteen percent, on an inflation-adjusted basis.
This equates to an average annual real rate of return on stocks of slightly more than seven-tenths of one percent for the first two decades of this century. That is not even close to the seven percent average annual return on an inflation-adjusted basis that stock market proponents are fond of citing.
In other words, the stock market returns for the this century are ninety percent less than their long-term average.
Below is a chart (macro trends.net) of crude oil for the past twenty years. As with stocks above, the price of crude oil is also adjusted for inflation and plotted on a logarithmic scale…
For eight years between 2000 and 2008, the price of crude oil quadrupled in real terms. After that, and in concert with stocks above, it lost two-thirds of its value, bottoming in January 2009, one month earlier than stocks.
Unfortunately for crude oil, that was not the bottom. After recovering a major portion of its losses it began another extensive decline in price in mid-2014. Then, after bottoming in early 2016, the price of crude oil doubled and then fell back to its recent low of close to $45.00 per barrel in December 2018.
After nineteen years of exclamatory volatility, crude oil at the end of last year was exactly where it was in February 2000 on an inflation-adjusted basis – $45.00 per barrel.
Now let’s look at gold. The chart below, as with stocks and oil above, shows prices for gold over the past twenty years and is inflation-adjusted, too, and plotted on a logarithmic scale… 
It seems somewhat ironic, but gold appears to be much less volatile than either stocks or oil. For the first eleven years of this century, the price of gold was steadily increasing, as contrasted with the extreme action and counteraction in the prices of stocks and crude oil.
Also, in stark contrast to stocks and oil, the price of gold actually increased substantially over the past two decades. Even after a drop in price of almost one-third since its high in August 2011, the price of gold ended 2018 more than three times higher than where it started the century in January 2000.
The three-fold increase (two hundred percent total return) equates to an average annual increase of six percent, which is nine times greater than stocks for the same period. And it is infinitely greater than crude oil which ended the same nineteen year period unchanged.
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!
Need A Second Opinion?
DO YOU NEED A SECOND OPINION?
Let’s face it. No one plans financially for disaster. We assume that if we are conscientious, persistent, and long-term oriented, that our plans – generally speaking – will find fruition.
We carry insurance to protect ourselves against financial loss from events such as death, major illness, disability, property damage, long-term care, etc.
But what about systemic risk?
How will you survive a complete credit collapse and loss of 50-90 percent of the value of all assets denominated in U.S. dollars? What about a full-scale depression?
When most advisors talk about investing in such a way as to minimize risk and avoid market blowouts, there is an implicit assumption that whatever the situation, it will be temporary; that the financial markets will continue to function.
Maybe that isn’t the case. Wide-scale bankruptcies, bank failures, and interruptions in communication channels could effectively stop markets from functioning at all.
Suppose you have an investment that generates huge profits for you during a stock market collapse; say a short position on some individual stocks or an ETF with a similar strategy.
Because of the leverage involved, if a market decline is steep enough and swift enough, there may not be any traders or other investors with money to whom you can sell your profitable ETFs or from whom you can buy back your existing short positions.
What if the U.S. dollar renews its long-term decline in accelerated fashion? Is runaway inflation a possibility and how would you be affected?
Do you understand the concept of fractional-reserve banking and the danger it presents?
Maybe you don’t own stocks. You might own bonds which provide you with interest income. Or real estate; or gold. Extreme negative market conditions will affect all of these things in ways you probably cannot imagine.
If you are worried or concerned about any of these things, or just feel the need to be better informed, you could benefit from a personal consultation.
Or, perhaps you are a corporate officer who has employees that would gain from a better understanding of these issues.
Whatever your particular situation, take action today. Send me an email with your concerns and questions. I will get back to you quickly.
Let’s talk… kwilliams@kelseywilliamsgold.com
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!
Federal Reserve And Market Risk
FEDERAL RESERVE AND MARKET RISK
Analysis and opinions of the financial markets vary depending on who is doing the analyzing. The most critical element that affects the song is the singer.
There is nothing wrong with that. But we should be aware that our own prejudice clouds our perspective. However, there is more that is not so obvious. With that in mind, lets take a look at things.
Today, more than ever before (at least it seems that way), focus is on the Federal Reserve. Even economists and the general public have joined the throngs of interested observers.
Stocks and bonds fell significantly over the past several days, partly in response to statements by Chairman Powell. The Chairman’s remarks indicated the intention of the Fed to continue its push to raise interest rates more aggressively, and without seeming regard to any deleterious effects on the economy and the stock market.
So, we hear criticism that the Fed is guilty of policy error. “The Fed needs to be more accommodative at this time.” Maybe; maybe not.
Gold vs. Stocks: Ratios Do Not Prove Correlation
GOLD VS. STOCKS
There is considerable extensive research and lots of articles written about gold vs. stocks. Sometimes, that is done in order to support or justify the argument that stocks are a better, long-term investment than gold. And the results seem to indicate that.
Except that gold is not an investment.
Gold is real money and a ‘store of value’. Its fundamentals have nothing to do with the fundamentals for stocks or any other investments. When gold is analyzed as an investment, it gets compared to other investments. And then the analysts start looking for correlations.
Some say that an ‘investment’ in gold is correlated inversely to stocks. But there have been periods of time when both stocks and gold went up or down simultaneously.
And, classifying gold as an alternative investment, or a safehaven asset, confuses people and creates unrealistic expectations. At least when comparing apples to oranges, we know that both of them are fruits.