The stock market has surged despite a struggling real economy, due to optimism around vaccines, big tech companies' dominance, and monetary policy support. However, this disconnect may not always support gold prices. While high inflation expectations and money supply growth could lead to longer-term stagflation, supporting gold, a stock market decline caused by tighter monetary policy may hurt gold as well. The impact on gold depends on the underlying reasons for any shifts in stock valuations or monetary conditions.

1. Disconnect Of The Stock
Market Support Gold

2. Points To Be Covered Today:
• Will The Disconnect Of The Stock Market Support Gold?
• Are We Entering Stagflation That Will Boost Gold?
• S & P 500 Index & Gold Prices
• 5 & 10 Year Tips Yields(Stagflation Is Coming)
• Bank Credit Growth

3. Will The Disconnect Of The Stock Market
Support Gold?
• The disconnect between the US stock market and the real
economy continues.
• The equity valuations are surging, while the economic recovery
remains fragile.
• As the chart below shows, the S&P 500 Index has surpassed
February’s peak and it did that in August, even jumping above
3,500 points.
• In September, there was a correction in the stock market, but
again, the equity valuations are going up despite the second
wave of coronavirus infections.

4. S & P 500 Index

5. Lofty Equity Valuations While The Real
Economy Is Struggling
• The first is that the stock market is forward-looking, so the
current elevated stock prices may reflect optimism about the vaccine
against Covid-19, a quick end to the pandemic and clear economic
recovery.
• Of course, this outlook may be justified, but it might also be the case
that markets are excessively optimistic about the initial vaccines’
efficacy.
• And just as the markets downplayed the likelihood and impact of the
first wave of the coronavirus, they can underestimate the
consequences of the second wave in the fall and winter as well.
• Keep in mind that the markets also expected a quick, V-shaped
economic recovery, which never materialized in the U.S.

6. Lofty Equity Valuations While The Real
Economy Is Struggling
• The second explanation refers to the S&P 500 composition. You
see, the simple truth is that the economic pain inflicted by
the epidemic and the Great Lockdown is being borne mainly by small
businesses and individual service proprietors (think restaurants, tour
guides, etc.), and not by publicly traded companies.
• The small players simply have too little capital to survive a
deep recession, while the big dogs were sitting on cash (and they
were often less indebted).
• Although some of the listed companies were also hit by the
economic crisis, others actually benefited from the pandemic.
• When small and medium companies went bankrupt or struggled to
survive, the big players achieved an even stronger market position
than before the economic downturn.

7. Lofty Equity Valuations While The Real
Economy Is Struggling - I
• Moreover, Big Tech has a large share in the S&P 500. The five biggest
constituents of the Index – Microsoft, Apple, Amazon, Alphabet (Google’s parent)
and Facebook – account for about 20 percent (or even more) of the entire market
capitalization, a modern-day record of market concentration. And by the way, the
coronavirus crisis was tech friendly.
• With millions of people locked down, companies like Amazon, Microsoft or Netflix
were the clear winners. But the S&P500 Index, excluding the big tech stocks
(often described by acronyms: FANG/FAANG/FAANGAM) performed much worse
than the general index which was clearly driven by a few giants.
• Last, but definitely not least, the Fed slashed the federal funds rate to zero and
backed the private bond markets. This is why the spread between the corporate
and government bond narrowed, despite the recession and increasing corporate
debt.
• Furthermore, it is precisely why the price of gold has moved recently in tandem
with equity valuations (see the chart below) – both markets were supported by
negative real interest rates.

8. S & P 500 Index & Gold Prices

9. How Will The Above Impact The Gold
Market
• The lofty equity valuations may be justified. The coronavirus crisis was tech-friendly, and
markets may be right by being optimistic about the vaccine and the eventual triumph over the
pandemic.
• However, what goes up can also come down, especially if we don’t witness a broad-based,
sustainable recovery.
• The current elevated valuations may result, at least to some extent – from government support
and the Fed’s dovish monetary policy, which may end someday. Therefore, the stock market
crash (or correction) does not have to be supportive for gold prices at all.
• If the equity valuations go down because Biden becomes the POTUS and he hikes the
corporate tax rates, then yes, gold can act as a safe-haven asset and shine. But, if the stock
market bleeds because Powell hikes the interest rates, then gold would suffer too (unless the
Fed turns hawkish because of the accelerating inflation).
• Therefore, yes, there might be a disconnect between the stock market and the real economy.
Of course, the stock market may correct to become better aligned with the economic
fundamentals, but precious metals investors should be careful what they wish for,
because they just might get it. The correction does not have to support the gold prices, if it’s
triggered by the normalization of the monetary policy.

10. Are We Entering Stagflation That Will
Boost Gold
• Inflation is back. OK, not inflation, but inflation expectations. As
the chart below shows, they plunged during the coronavirus
crisis, but they have already recovered.
• Currently, and based on the inflation-protected Treasury yields,
Mr. Market expects that inflation will be, on average, 1.5 percent
in the next five years and 1.7 percent in the next ten years.
• Meanwhile, the real bond yields have continued their downward
trend.
• As the chart in the next slide shows, the yields of 5 and 10-year
Treasury Inflation-Protected Securities plunged from around
zero in January to around -1.15 in mid-September.

11. 5 & 10 Years Inflation Expectations

12. 5 & 10 Year Tips Yields(Stagflation Is Coming)

13. 5 & 10 Year Nominal Treasury Yields

14. M2 Money Supply Annual Growth Rate

15. Velocity Of M2 Money Stock

16. GDP & Money Supply Growth

17. GDP & Money Supply Growth - I
• Please note that in the aftermath of the Great Recession, the ballooning Fed’s
balance sheet and monetary base were accompanied by slowing M2 money
supply growth.
• Because of the financial crisis, loan growth declined sharply. In contrast, today,
the banking system is in a healthier position, and commercial banks substantially
expanded the credit creation.
• Of course, the rise in the broad money supply was partially a result of companies’
drawing down on pre-arranged credit lines, not the irrational exuberance of the
commercial banks (although government guarantees make banks to provide
loans to many sub-marginal companies), but the end result is the same: the rapid
expansion in the bank credit and the broad money supply.
• As the chart below shows, the total bank credit growth accelerated from about
5.3 at the beginning of the year to 11.3 percent in May. Hence, the risk of inflation
is higher than in the aftermath of the economic crisis of 2008.
• It makes the current macroeconomic environment even better for gold.

18. Bank Credit Growth

19. Bank Credit Growth - I
• To sum up, although the increase in the mere monetary base does not have to
translate into higher inflation, the record fast expansion in the broad money
supply is disturbing, and it
• increases the risk of inflation or stagflation sometime in the future. The supply
chain distortions, ballooning federal debt, and more dovish Fed, which is eager to
accept inflation above its 2-percent target for some time, also add to this risk.
• As higher inflation increases the appeal of gold as an inflation hedge, and
decreases the real interest rates, the heightened stag Inflationary risk should
support the gold prices.
• Of course, the coronavirus crisis has also resulted in a massive drop in GDP
growth and an increase in spare capacity that can keep consumer price inflation
low for some time.
• However, when the economy recovers somewhat, while the large monetary and
fiscal stimulus program continues, the broad money supply's unprecedented fast
growth could end up being inflationary after a certain lag. When gold sniffs out
the smell of inflation, it should shine.

20. Disconnect Of The Stock
Market Support Gold

21. THANKS FOR LISTENING
Disconnect Of The Stock Market Support Gold