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What gold tells us about confidence

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How badly has the pandemic affected the global economy? The United Nations Development Programme (UNDP) has some answers in a recent report. It expects global human development to decline for the first time this year, and EM economies will bear the brunt of the impact. The International Labour Organization (ILO) estimates that up to half of global workers could lose their jobs.

New UNDP estimates Global human development – as a combined measure of the world’s education, health and living standards – is on course to decline this year for the first time since the concept was developed in 1990. The decline is expected across the majority of countries – rich and poor – in every region.

  • Global per capita income is expected to fall four percent. The World Bank has warned that the virus could push between 40 and 60 million into extreme poverty this year, with sub-Saharan Africa and South Asia hardest hit.
  • The International Labour Organization (ILO) estimates that half of working people could lose their jobs within the next few months, and the virus could cost the global economy US$10 trillion.
  • The World Food Programme says 265 million people will face crisis levels of hunger unless direct action is taken.

While the human development is falling this year, the market’s perceived decline of confidence did not begin with the COVID-19 pandemic. Last week, I highlighted a comment by Joe Wiesenthal at Bloomberg when he focused on the stock/gold ratio as a barometer of optimism and pessimism (see Checking the small business economic barometer). I would go further to characterize the ratio as a barometer of investment confidence in human ingenuity.

It’s such a pure and simple expression of optimism versus pessimism. When you bet on stocks you’re betting on humans endeavoring to do productive things. When you bet on a shiny inert metal you’re betting on a shiny inert metal.

The chart of the stock/gold ratio surprisingly revealed that it peaked in the summer of 2018 and it has been falling ever since. Since that 2018 peak, both stock and gold prices have climbed, but gold has outpaced stocks. The decline in the stock/gold ratio is worrisome for long-term equity investors.

The stock/gold ratio outside the US, as represented by the MSCI World xUS Index, looks even worse. The MSCI World xUS Index never recovered its pre-GFC peak. Gold, as priced in euros, has reached all-time highs. The post-GFC equity market recovery is entirely attributable to the outperformance in the US.

What is the market telling us about optimism and pessimism, and global investment confidence?

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