As you can imagine, covering the largest banking firms can be quite a complex task. But at the end of the day, the most important consideration for organizations like Bank of America (NYSE:BAC) is that they are economic bellwethers. Sure, the nuances of their specific fundamentals allow for some distinction. But especially at a time like this, investors should not get overly analytical with BAC stock.
Recently I wrote an article about Bank of America’s rival, Wells Fargo (NYSE:WFC). According to a Bloomberg report, investors had gotten nervous about Wells due to its lower-than-expected net interest income guidance. Unsurprisingly, the novel coronavirus pandemic negatively impacted loan demand, hurting the case for Wells. And while Wells Fargo had some controversies that are unique to it, loan demand (or lack thereof) is something that should concern the owners of BAC stock.
But I didn’t focus on that narrative because there was something more glaring working against bank stocks: rising gold prices. In this technologically advanced age, gold really doesn’t serve a purpose other than being decorative. So the fact that gold hit record prices this year and still remains elevated is important.
Look, those investing in BAC stock or in similar banks like JPMorgan Chase (NYSE:JPM) and Citigroup (NYSE:C) are investing in infrastructure, businesses and, ultimately, people. Plus, they’re getting dividends for their troubles.
Gold is a metal that doesn’t do anything. In an environment in which many investors are desperate for yield, gold is the most cynical play. It will never pay a dividend because it’s an inanimate object. Thus, if inanimate objects are enjoying a bull market, that’s meaningful.
Money Velocity Is the Ultimate Challenge for BAC Stock
In my opinion, soaring gold prices are more than enough reason to be skeptical about BAC stock. Forget about my personal bullishness on precious metals; gold is a universal indicator of fear. The higher its prices go, the more fear there likely is among investors.
For those who need more convincing, then check out the relationship between BAC stock and the velocity of money. First, some background. According to the Federal Reserve Bank of St. Louis:
The velocity of money is the frequency at which one unit of currency is used to purchase domestically- produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time.
Logically, then, if BAC stock is rising, money velocity should also be increasing. After all, the purchases of goods and services not only implies strong consumer sentiment but also a robust business ecosystem. Therefore, metrics like loan demand should rise, benefitting the banking sector.
Click to Enlarge
Indeed, between 1983 and 1989, and between 1990 and 1998, BAC stock and money velocity shared a 43% and 77% correlation coefficient, respectively. Interestingly, the strength of this direct relationship increased over time.
But suddenly, beginning in 2000, Bank of America pulled a Michael Jackson. Between 2000 and 2006, the bank’s stock and money velocity had an inverse correlation coefficient of -48%. Later, between 2011 and the end of last quarter, the magnitude of this inverse relationship soared to -69.5%.
I cannot stress how absurd this dynamic is. In the prior, logical paradigm, more money velocity usually boosted the BAC stock price. In the current, illogical paradigm, lower money velocity causes the stock to increase.
I’m sorry, but something has got to give.
As Big of a Warning As You’re Going to Get
After rumors circulated that Michael Jackson had bleached his skin, many people came to his defense, arguing that the King of Pop suffered from a pigmentation disease. However, according to Vox.com, legendary record producer Quincy Jones wasn’t buying it, calling the explanation ridiculous.
Whatever the reason was for Jackson’s appearance, it was jarring. To the public, it certainly looked like he had changed his race.
I’m experiencing the same jarring effect when I look at the relationship between Bank of America’s stock and money velocity. We transitioned sharply from a logical relationship to one that absolutely makes zero sense.
Thus, it’s no wonder why people are buying gold. This is fear, folks!
Furthermore, the explanation that this is due to the novel coronavirus doesn’t resonate. As I mentioned above, the dissociation from reality began around the turn of the century.
Essentially, we’ve got decades of bad monetary policy to unwind. However, let’s be real: no administration will have the political will to fix this crisis. So, I’d stay away from the banking sector right now because the other Jackson – the one on the $20 bill – might get his wish after all.
On the date of publication, Josh Enomoto held a long position in gold.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.
