Tesla (NASDAQ:TSLA) and gold have absolutely nothing to do with one another. In fact, they represent opposite extremes of the investment spectrum.
One of them is the bright, shiny object that millennials revere. The other is a bright, shiny rock that civilizations have cherished for thousands of years.
Tesla is the uber-hip investment that epitomizes the technology sector’s stock market dominance. Gold is the has-been investment that still manages to catch a bid from time to time. It is the Hollywood legend that receives polite accolades when it returns to the screen to attempt one final Oscar-winning performance.
And yet, despite the substantive differences between Tesla and gold, both of these assets are attracting brisk investment demand. The chart below provides a glimpse into this phenomenon.
Because investors have been pouring money into gold exchange-traded funds (ETFs) for the last several months, the gold holdings in these funds have surged to a record 101 million ounces.
That quantity of metal, multiplied by the current gold price of $1,742 an ounce, yields a total market value of $176 billion.
Meanwhile, investors have been feverishly pouring money into Tesla shares — powering the auto company’s market value to more than $180 billion. And voilà! Tesla’s market value is nearly identical to the market value of all gold ETFs.
Obviously, the chart above presents a picture of mere coincidence, not causation. But even though Tesla and gold share no fundamental connection to one another, they do share one common trait.
The Rules of Attraction
That’s magnetic attraction.
Both assets emit a sort of pheromone that attracts investors — albeit very different types of investors. Kind of like the way Warren Buffett’s annual shareholder meeting draws about 40,000 folks to Omaha each year, and the AVN Adult Entertainment Expo draws a similar number of attendees to Las Vegas each year.
There’s probably not a lot of overlap on those two attendee lists.
It’s easy to see why the fan bases of both Tesla and gold have become both larger and more enthusiastic. Over the last two years, gold has produced double the return of the S&P 500, while Tesla has delivered 10 times the return.
The cutting-edge automaker’s stock has been rocketing higher for so long that it broke away from any connection to traditional valuation norms at least 500 points ago.
But so what? The stock continues to soar … and to enrich its shareholders. It is the world’s most valuable car company, even though the world’s second most valuable car company, Toyota (NYSE:TM), manufactures about 20 times more cars per year than Tesla and generates about 10 times more in annual revenue.
Meanwhile, over in the gold market, even though the yellow metal’s price has been climbing since 2018, it remains well within parameters that most investors would consider “normal.”
But if past is prologue, the gold price will become much less normal over the next two or three years.
You see, the money flooding into the gold market isn’t merely large. It is also fast.
In fact, investors are buying into gold ETFs at the fastest pace since 2016. That buying has produced a 20% jump in ETF gold holdings, compared to one year ago.
That’s a promising sign for the gold market. Here’s the quick and dirty…
Gold’s New BFF
Based on the last 15 years of data, whenever the combined quantity of gold inside all the gold ETFs increased by 20% or more year-over-year, the gold price performed brilliantly over the ensuing one-, three-, and five-year time frames.
Based on monthly readings, ETF gold holdings have jumped more than 20% only 36 times out of 179 observations dating back to 2005.
After those 36 instances, the gold price was:
- 17% higher on average one year later
- 40% higher on average three years later
- 106% higher on average five years later
Obviously, these impressive historic results could have been flukes. But even if that’s the case, a similar fluke seems likely to occur over the next year or two.
That’s because the gold market has a new “BFF”… and his name is Jerome Powell, chairman of the Federal Reserve.
Earlier this month, Powell shocked investors by stating his intention to hold interest rates near record-low levels until at least 2023.
First, the Fed almost never publicizes a two-year policy stance. That’s because two actual years is like 100 “Fed years” — meaning that economic conditions have become so volatile and fluid that no one can realistically establish a policy today that would automatically be appropriate for 2023. Not even the chairman of the Federal Reserve.
Second, for a Federal Reserve chairman, Powell’s commentary about interest rates was remarkably clear and direct:
“FOMC participants expect, as their baseline expectation, no rate increase at least through 2022… So, we’re not thinking about raising rates. We’re not even thinking about raising rates. What we’re thinking about is providing support for this economy.”
Powell left no room for conjecture about what he meant by those comments: Low rates for a long time.
That’s music to the ears of the gold market, because as I’ve discussed in several previous musings, gold loves low interest rates.
The logic of this relationship is simple: If CDs, bonds and other fixed-income investments are paying miserly rates of interest, gold becomes a relatively attractive asset to hold.
That’s because the “opportunity cost” of holding gold is negligible when rates are super low. Further, gold has the ability to appreciate significantly and/or offset the effects of inflation over time.
In a low-rate environment, CDs and money market funds can do neither.
Heavy government spending also tends to delight the gold market, as the chart below clearly shows. Whenever government deficits lurch sharply higher, like they did in the periods from 2001–03 and 2007–09, the gold price also moves sharply higher.
Today’s deficit-spending-palooza is just getting underway, and by the time 2020 wraps up, the annual deficit will probably top a mind-numbing $4 trillion.
That’s more than the total debt the United States amassed under its first 42 presidents — a period that spanned more than 200 years. In other words, $4 trillion is a big number, even for a big economy like ours.
That monster deficit creates fertile soil for the gold market, especially now that Powell is promising to fertilize and water that soil with rock-bottom interest rates until 2023.
As I explain further in this special presentation, this trend isn’t going anywhere anytime soon.
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Eric Fry is an award-winning stock picker with numerous “10-bagger” calls — in good markets AND bad. How? By finding potent global megatrends… before they take off. And when it comes to bear markets, you’ll want to have his “blueprint” in hand before stocks go south. Eric does not own the aforementioned securities.