Gold and the Lehman Brothers Moment

1. It’s not true that gold is a safe heaven during recessions. You can see from the following image (gold is in a color that is as much as closest to gold as I’ve found, S&P 500 candles – and green areas are US recessions) that gold tends to correlate the stock market partly during recessions.

Gold & S&P 500 over a wide spectrum

2. However I emphasized ‘partly’ since when things get nasty (and we’re not there yet), then gold indeed gets inverse correlation to the stock market. Zooming in Gold vs S&P 500 during the past two main recessions (2001 & 2008), we can see the following pattern –

Phase #1 – Gold grinds down with the market.
Phase #2 – Gold inverse the market when capitulation event arrives (e.g.: Lehman Brothers moment in 2008).

The two phases of Gold action – 2008 crisis.
The two phases of Gold action – 2001 crisis.

I can go on to the 3rd and 4th phases (market goes up with Gold, and then market does better than Gold), however that’s too remote.

Why there are distinct two different phases? Maybe since people needs the money during layoff period (therefore USD get strong when entering recession), and the left money (investment one, not consuming one) needs to find better home – then it goes to gold.

Now the million ₿ question is – we’re probably after the 1st phase – the rush to USD fiat one, however are we heading into the 2nd phase, or did we bottom already? I believe we’re heading the 2nd phase, and therefore I’m staying on the sidelines yet and thinking of precious metals/commodities ATM, however this is only a probability game.

There are no ‘white swan’ events in life, world peace has never happened yet, and probably will never be, however we might not see worst things than we already did – there’s your risk or ‘risk’ (we’re on the bull argument side).

On the other hand we have China financial system collapse and maybe even regime risk that might lead to nationalism rise and Taiwan hit etc-etc, which might impact us all, and winter in EU is in front of us, and Iran getting nuclear might shake the middle east and some other climate lie that I don’t believe in but whatever and the whole world is full of debt that no-one can return and countries bankrupt gonna domino the deficit of the lending entities and so on.

Conclusion, as always – diversity: 40% in precious metals/commodities ETFs, 50% in *USD cash, 10% for trading/risk investing (if you believe capitulation will arrive – why not shorting the market? if you believe we’ve bottomed already – BTC/ETH, if you’re not sure – USD cash.)

* USD cash ≠ crypto stable coin, if it’s not clear. I mean USD fiat in your traditional KYC bank account that is insured by your government.

This price movement of Gold today (21 Sep 2022) had just proven my thesis above.

I’ve marked in ellipse the fear zone where reports of Putin’s speech had just published (who remembers it now, LOL.)

Putin’s fear speech

Pay attention that BTC (candles) goes down with Nasdaq (Cyan), while gold moved sharply into the opposite direction. It’s clear from this chart (the end of it is FOMC 75 bps announcement) that indeed Gold correlates the stock market in usual times, and actually functions worst than fiat during mild recession – however in the event of capitulation, it might still be the store of value, like I’ve stated above (refer to phase #2).

…so the only left bear question is – whether we gonna grind down into recession, or something’s gonna break (i.e.: ‘the Lehman Brothers moment’). Since we can’t tell in advance, I think I’m gonna DCA a bit from USD fiat to gold, partially, taking into account it might grind down with the market however will hedge me in case Putin / Xi gonna lose it or Biden will be proven his stupidity big time.

Leave a comment

Your email address will not be published. Required fields are marked *