The Not-So-Bizarre Dual Rally in Commodities and Stocks

Written by Adam English
Posted August 3, 2021

While the stock market is at all-time highs, gold isn't far behind.

Sure, it's pulled back some, but prices are around 90% of their peak last year and trending up.

This may seem counterintuitive with both rising at the same time. In some ways it is, but it isn't.

It isn't just a doom-and-gloom counter-narrative, though plenty of gold haters always see any rise in gold prices that way.

Instead, what we're seeing is the formation of a long-term trend both in underlying causes and investor activity.

This gold bull market is firming up and growing even stronger behind the scenes.

The timing couldn't be better for us.

With the Fed and other central banks directly intervening in bond markets and keeping yields at near- or below-zero, it makes sense for both gold and the stock market to go up at the same time.

It risks being overly simplistic, but the vast majority of investors and investor funds have four choices: cash, stocks, bonds, and commodities.

Cash is clearly not ideal since it can generate no profit but it does buy investors time and flexibility. Inflation will only eat away at real returns though.

Bonds are a wasteland in spite of greatly increased risk thanks to intervention by the Fed and other central banks.

That leaves two options for anyone wanting any kind of return for their risk and for money that would normally go to bonds to spill into.

We're certainly seeing a lot of interest in stocks in spite of the economic peril. Of that there can be no question, but putting all our eggs in one basket and counting on perpetual growth is dangerous.

That leaves a need for commodities. For many years they have attracted historically small amounts of investor interest. That is changing in a profound way.

It doesn't take much to move the needle in a major way. Commodities and their related stocks are a relatively tiny slice of the broader investment world, both for number of investors and for total size of their investments.

Gold is up 19% since the start of 2020 and many miners are doing fantastically better thanks to the boost. Silver has jumped 43% and copper is up 62% over the same time frame.

That spillover and increased concern about the direction of currencies and economies as recovery growth slows and the Delta variant rages is creating something in the commodities space we haven't seen in years.

From mom-and-pop investors and pension funds, to private wealth managers and insurance companies, interest in gold is finding a very broad base of support.

Gold ETFs and funds are seeing record inflows from small investors.

Even Pimco, the go-to shop for bond products, moved towards gold. As Geraldine Sundstrom, who focuses on asset allocation strategies, told Bloomberg, “We need to diversify our diversifier and look for safe haven beyond government bonds. Given Pimco’s view that rates will be kept very low for years to come causing depressed levels of real yield, gold feels like an appropriate diversifier.”

Citigroup Inc. mentioned “new non-traditional investors in bullion, including insurance companies and pension funds” in a recent note to investors without going into specifics.

Bank of America, Morgan Stanley, JPMorgan, and Goldman Sachs have been telling investors that gold is going to keep surging for even longer. Some of their bullish models call for gold from $2,300 to $3,000 before the run ends.

Even notoriously tight-lipped private banks and funds have admitted to large increases in gold allocations for their clients. Swiss private bank Lombard Odier & Cie SA fessed up recently and Arbuthnot Latham & Co. admitted to adding gold mining companies to its mix.

This broad interest across all investor types is creating a similarly broad base of support for rising gold prices.

This isn't a melt-up scenario where a relatively small group of very interested investors bid each other up. There will be no flash crash like we saw in Bitcoin several years ago, or other flash-in-the-pan investment fads.

This is a broad upturn based on factors that will play out for years to come and provide a floor to slow or prevent downturns in price.

Economic uncertainty, zero yield quality bonds, and a need for diversification from historically high overrepresentation of stocks in portfolios. It all adds up.

This is how a long-term upward trend in gold prices is forming behind the scenes right now.

The trend will only get stronger as more come on board. More investors and money will keep flooding in.

Make sure you have an advantage they don't have.

Take care,

adam english sig

Adam English
Editor, Outsider Club

follow basic @AdamEnglishOC on Twitter

Adam's editorial talents and analysis drew the attention of senior editors at Outsider Club, which he joined in mid-2012. While he has acquired years of hands-on experience in the editorial room by working side by side with ex-brokers, options floor traders, and financial advisors, he is acutely aware of the challenges faced by retail investors after starting at the ground floor in the financial publishing field. For more on Adam, check out his editor's page

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