Our Tuesday morning issue was all about how the fantastic success of retailers this holiday season is actually a harbinger of what’s to come for the U.S. economy…
And that’s a slowdown.
Don’t get me wrong, when fourth-quarter earnings are rolled out, those numbers will be bangin’.
But like many economic data points, earnings beats or misses are lagging indicators — not leading ones.
They tell us whether or not our thesis was right last quarter, not whether it will be correct going forward.
So where does that leave market growth for 2022?
In order to determine what lies ahead, we have to instead understand the factors that make economies grow.
The equation is actually pretty simple… It’s the equation for Gross Domestic Product (GDP).
Source: Fortune Research
GDP, Gold and Market Growth in 2022
The first variable there — consumer spending — is the largest by a wide margin at 70%.
Government spending and business investment are roughly equal at 17% and 18%, respectively.
And because we’re an importing nation, exports minus imports will always be negative. Usually, this figure comes in down roughly 5% (with imports comprising around 13% of total GDP minus 18% exports).
So that inevitable post-holiday slowdown in retail sales is really a proxy for consumer spending, which has huge negative implications on GDP.
But let’s think about those other components too.
My home state senator, Joe Manchin, recently dealt a big blow to the “G” in that equation by saying “no” to the Biden administration’s Build Back Better spending plan.
So although I do believe we will pass a portion of it in some form, it will be smaller. Additionally, we won’t be issuing checks to anyone to stay home after the Child Care Tax Credit expires in January.
That means that “G” will be lower, too.
And while the “I” — business investment — will likely continue to climb upward, disinflationary pressures on commodities and other raw materials/input costs will likely slow relative to the past few quarters.
Source: Bloomberg
In fact, business investment is already starting to flatten out as of Q3, shown in the chart above.
Balance of trade (“M”) isn’t likely to change much — if anything, it will move sideways. However, it will be moving sideways at the largest imbalance in history.
So, with each component of the GDP equation likely to face headwinds in 2022, it’s impossible to project the same breakneck pace of robust market growth.
Instead, the market grinding sideways to lower beginning in late Q1/early Q2 is a much more probable outcome.
And in general, over the past several decades, one of the best asset classes to hold during periods of slowing market growth is that favorite holding of fiat-hating anarcho-capitalists and Peter Schiff disciples everywhere…
Gold.
Source: Bloomberg
It’s pretty obvious in that chart there’s a clear inverse relationship. When one goes up, the other goes down, and vice versa.
Moreover, the correlation has gotten stronger in recent years… as it should have with all the bazooka money JPOW recently blasted into the market.
Now, I’m a mining analyst, so I’m inherently partial to stuff we dig out of the ground.
But I’m not a gold bug; I’m a realist.
In fact, as recently as a month or so ago, I was actively short the yellow metal!
When the facts change, however, I change my mind. And slowing market growth in 2022 means we need to pay attention here.
Source: Bloomberg
From a price perspective, there is strong support at both $1,750 and $1,685 per troy ounce, the former represented by the thick blue line in the chart above.
Looking more recently, we tested that level three times over the past two months.
Source: Bloomberg
I’m not sure we’ll get another chance to buy quite that low, but we do want to begin some at or below the $1,800 level, if possible.
In pricing terms of SPDR Gold Shares (NYSEArca: GLD), that would correspond to picking up some shares at or below the $168 level.
Source: Bloomberg
That’s not today, of course… we’ll need an up day in equities to get a chance.
But I have a sneaky suspicion we’ll get one next week or soon thereafter.
Updated watchlist below…
Source: Bloomberg
In the meantime, stay frosty, folks, and take some profits!
All the best,
Matt Warder
Fortune Research
