On Thursday, January 23, the Dow sank over 175 points, losing more than 1% on the day. While it was a bad day for the overall stock market, it was a good day for bonds and gold.
The 10-year yield went down to 2.77%, meaning bond prices went up. Meanwhile, gold went up almost 2% to go over the $1,260 per ounce level.
Stocks were supposedly down because of fears over a slowing economy in China. But while that news is interesting, I would like to focus on bonds and gold.
It is noteworthy that they are moving somewhat in tandem. This has not always historically been the case. In the 1970’s, during a period of increasing inflation, gold performed well and bonds performed poorly with increasing interest rates.
In the 1980’s, things switched up. As inflation fears faded, gold went down and interest rates also went down, driving bond prices up.
It has only been in the 21st century that the two have been more highly correlated. Gold finally started to do well again at the turn of the century, after having been a terrible investment for the previous 20 years.
Meanwhile, bonds continued to do well, as interest rates went to historic lows. While bonds have not done as well as gold over the last 12 to 14 years, they have still been a decent holding.
As stocks went down on Thursday, investors turned to both bonds and gold. One thing that the two investments have in common is that they are both sought after for safety. When investors are fearful, they will tend to go to one or the other.
The difference is that fearful investors will turn to gold when the fear is inflation. Investors will turn to bonds for safety when the fear is recession, depression, or deflation.
While Thursday’s market in no way makes a trend, what if investors continue to sell stocks? Where will they go?
Right now, it looks as if they may be undecided. Perhaps a better way of stating it is that different investors are fearful of different scenarios. The people buying gold are worried about more Fed inflation and a depreciating currency. People buying bonds are worried about another major downturn in the economy.
We don’t know which ones will turn out to be right. Maybe both bonds and gold will continue to do well. Or maybe Thursday was a trick and we will see stocks regain their footing and eventually surge to new highs.
2014 could be an interesting year. The Fed has created quite a mess with all of its so-called quantitative easing, which is nothing more than creating money out of thin air.
If the economy hits another major downturn, will we see the 1970’s again with rising inflation and rising interest rates? Or will we see 2008 again with a major recession and relatively low price inflation and low interest rates?
If stocks do poorly in 2014, it will be interesting to see who wins the battle for the money looking for safety. Will it be the bond buyers or the gold buyers? Maybe it will be both, at least in the short run.
UPDATE: As an additional note, this post was first written on Thursday night. Following that, on Friday, January 24, the stock market tumbled even more. Bonds were up again and gold was up slightly.