Most observers, with a few exceptions like Hunt, agree that bonds are expensive. But experts like former Fed chairman Alan Greenspan have been saying that for years and, at least in the Treasury market, their prices keep rising.
Gold, meanwhile, has underperformed for most of the last eight years, and spent several years trying to find a base. In recent years, it has started rising in a stealthy manner.
Cuggino likes to compare the ratio between the price of gold, currently about $1,940 an ounce, with the S&P 500 which sits at 3,400. That translates into a ratio of about 0.6. Over modern history, Cuggino says the ratio has ranged from 0.3 to 1.7. That means gold is still relatively cheap compared to equities on a historical basis.
So will the deflationists who turned out to be right after the Great Recession confound the mainstream conventional wisdom once again? Cuggino isn’t so sure.
There are some big differences between the recent round of stimulus and what happened back in 2008 and 2009. The first is that the size of the current bailouts dwarfs the $700 billion TARP program and the subsequent $800 billion stimulus.
But most of those two so-called bailouts were used to allow banks to shore up their balance sheets and rise out the housing crisis while much of the American public watched their primary asset, their house, drop by 30% or 40%. To see how consumers react when they are paying mortgages every month on houses with market values that are under water, all one had to do was look at the Japanese experience of the 1990s.
Indeed, it's too early to say, but the pandemic appears to be spawning a housing boomlet of sorts, as people look to move out of big cities to places where they can find more space. A real estate boom accompanied inflation and surging gold prices during the 1970s.
This time, much of the stimulus was structured differently. Cuggino notes it has gone directly into the pockets of American small businesses and consumers.
“Going forward, when this money starts sloshing around the economy, inflationary pressures could build,” he says.
Another critical factor is the U.S. dollar. Cuggino acknowledges that he doesn’t know if it still has staying power. Politicians as diverse as President Trump and Massachusetts Senator Elizabeth Warren have vocally advocated policies that would weaken the greenback. If they were to succeed, it would further strengthen the argument for gold.