One of the best-performing assets out of the 2008 crisis was precious metals. History is likely to repeat as recent developments are very bullish for the sector. Gold
Looking Back at 2008
In 2008 due to the financial crisis, the economy was weak, and the Federal Reserve was aggressive in supporting various credit markets to prevent a negative spiral and loss of confidence. The consensus was for a period of low rates followed by an explosion in inflation.
Precious metals like gold and silver led all financial assets through the first couple of years of the bull market. They also bottomed earlier than other assets. For example, gold bottomed in October 2008, while the S&P 500
Striking Parallels, Better Fundamentals
This time, the fundamentals are even better because not only is monetary policy at maximum dovishness but this time, fiscal policy is also being aggressively deployed. It seems that fiscal policy is following the path of the Fed's open-ended QE when it maintained asset purchases until full employment or inflation exceeded 2%.
Congress will likely continue to pass trillion-dollar stimulus programs until the employment situation stabilizes. In 2009, Republicans were concerned about deficits and the debt and steadfastly opposed these programs. Under President Trump, they no longer feel the same way. Given the damage and change in consumer behavior following the coronavirus outbreak and economic shutdown, economic activity is not going to quickly normalize.
There are also secondary consequences and risk factors like the possibility of extended shutdowns if the virus reemerges once "stay-at-home" orders are lifted. Another worry is the domino effects of a slower economy like renters, restaurants, and retailers going out of business which could cause a wave of defaults among commercial real estate or consumers cutting back on spending and saving more or lower multiples due to Congress legislating against buybacks.
Gold's Breakout
While these struggles are real for the economy, businesses, and consumers, they translate into strong fundamentals for gold. Interest rates remain low, and the combination of monetary and fiscal stimulus has the potential to be inflationary.
Gold peaked in 2011 and was a serious underperformed for the duration of the bull market as it turned out that monetary policy without fiscal policy and risk appetites was not inflationary. This time, it has a much better chance of being inflationary.
On a technical level, gold is at $1,700 and a mere $200 away from its all-time high. It is emerging from a more than six years of trading in a tight range which worked off overbought and overbullish conditions from its peak in 2011. Given the strong fundamentals and technicals, traders should focus on precious metals rather than stocks. Investors should look to accumulate on weakness.
