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Under what investing scenario does Gold shine and the US Dollar dim?
During scenarios where the US risk-free rate of return equals the expected capital appreciation of US stocks, and both are elevated, we expect Gold stocks to outperform and the US dollar to fall in value.
Last week we ran our Chicago Quantum Net Score model and we set an input parameter incorrectly. We set the risk-free rate of return that investors can earn equal to the expected capital appreciation rate on US equities. Both were set to 9%.
What happened was that our model suggested two unique types of investments to shine on a risk-adjusted basis in that scenario. These are not normally investments that rise to the top and we were surprised.
- Stocks that track the performance of gold (e.g., AAAU — or an exchange traded fund that tracks the value of warehouses full of gold), and gold mining stocks.
- Bearish bets on the US Dollar.
The model did not suggest that investors buy and hold a major diversified US equity index, it suggested a bet against the dollar and a bet on the rise in the price of gold.
Why do we think this happened? We believe that in a scenario where interest rates rise dramatically to equal economic value creation, investors face a broken equities market where it is not worth the risk.
Therefore, money flows elsewhere, either into commodities or other investment locales.
