EC Gold & Bonds During A Pandemic - Comparing Two Opposite Sources Of Crisis Profits

While stocks were performing very poorly in the early days of the pandemic shutdowns, gold was doing quite well. There was another crisis investment that was doing even better however, as can be seen in the graph below, which shows price changes in percentage terms when compared to mid-February.

Stocks are the green line, gold is the yellow line, and the red line is the prices of 10 year U.S. Treasury obligations.

There is a great deal of similarity between how long term Treasury bonds performed and how gold performed as the crisis was rapidly growing. There were however two very important differences, with some important implications for the future, as will be explored in this analysis:

1) The source of the bond profits in crisis was the direct opposite of the source of the gold profits, despite the similar appearance.

2) While it might come as a surprise for many investors, long bonds were a substantially more profitable investment than gold at the height of the market crisis, as can be seen by comparing the heights of the red bond line and the yellow gold line, at the time of the bottom for the green stock line. Indeed, compared to prices before the breakout began, gold was losing money on the day of the stock market bottom, even while bonds were at near peak prices.

This analysis is part of a series of related analyses, which support a book that is in the process of being written. Some key chapters from the book and an overview of the series are linked here.

Gold, Stocks & Bonds

In the previous analysis in this series (link here), we explored the relative performance of gold and stocks (as represented by the S&P 500) between early February and late May, as the coronavirus pandemic and the resulting economic shutdowns transformed global economies and markets.

The wide gap that developed between gold and stock prices with the pandemic and shutdown is a very good short term example of the contra cyclical relationship between gold and stocks.

That short term relationship was also an almost perfect match with what fifty years of financial history shows us is perhaps gold's most valuable investment attribute over the long term, which is not just inflation protection, but its contracyclical relationship with stock prices, as shown in the graph above.

When we add the red line for percentage changes in ten year U.S. Treasury prices, it can be plainly seen there is another asset category that has also been moving in the opposite direction of stocks, and that is long term Treasury bonds

That long bond prices would soar with another round of crisis and the containment of crisis was entirely predictable and expected, as I have been exploring for readers for what is now years in advance - but the source of the price movement is quite different from that of gold. Indeed, it could be called night and day different, as illustrated in the graphic below.

Gold investment is a method for protecting against a deepening of the crisis, and a failure on the part of the Federal Reserve to maintain financial, market, or monetary stability. Gold is a form of portfolio insurance, and as such is essentially betting against the Fed succeeding in its unprecedented efforts. As developed in Chapter 19 and explored in previous analyses - over the long term, in secular cycles, gold has a track record of superb performance for troubled times when stocks are at their worst.

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Disclosure: This analysis contains the ideas and opinions of the author. It is a ...

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