gold investment, silver investment

Precious metals investment terms A to Z

Goldilocks Economy

Once upon a time, a little girl called Goldilocks came to a house of Three Bears... We guess that you have heard the whole story. For sure, you have – Goldilocks and the Three Bears is one of the most popular fairy tales in the Western world. Now, you might wonder why we refer to the story for children in the dictionary for terms related to the precious metals investing. The reason is, of course, the Goldilocks economy we still have, to the despair of gold bulls.

What is actually the Goldilocks economy? It is an economy which combines a moderate GDP growth and low inflation. As one can see in the chart below, the two most famous and the longest periods of the Goldilocks economy occurred in the 1990s and in the 2010s.

Chart 1: Real GDP growth (red line, % change yoy) and inflation (green line, CPI, % change yoy) from Q1 1970 to Q4 2018

Goldilocks Economy and Gold Chart

So, just as the porridge of the Little, Small Bear, whose temperate was adequate, the goldilocks economy is the economy which is neither too hot, generating inflation, nor too cold, creating recession, but just right. At least right for the Wall Street. Stock market investors love the Goldilocks economy as it allows a market-friendly monetary policy, or it does not create reasons for the Fed to intervene and change its course. Remember, no bull market dies of old age – the Fed has killed every one of them through monetary tightening. In a beneficial macroeconomic environment however, companies grow, generate positive cash flow, earnings are on a growth trajectory, so the stock market performs well. This usually coincides with investors willing to pay more for the income the shares generate as evidenced by a growing P/E ratio.

Goldilocks Economy and Gold

But what about gold  performance in the Goldilocks economy? Although the former includes “gold” in its name, it is not supportive to the yellow metal. After all, gold is a hedge against inflation and a safe-haven asset which shines the most during periods of either high inflation or deep recessions. Hence, the combination of low inflation and moderate growth is not particularly encouraging outlook for gold investment. Indeed, in the 1990s, gold entered the bear market. In the 2010s, gold also struggled.

However, gold bulls should not forget that all fairy tales have a happy ending. One day, some political or economic shock will happen and disturb the delicate balance of the Goldilocks economy (after all, the 1990s boom ended with the dotcom bubble, which triggered the bull market in the gold market). At some point, the bears return home, while the Goldilocks runs away. The girl’s hair might glitter like spun-gold, but it will never shine as brightly as genuine gold.

We hope you enjoyed the above definition. We encourage you to learn more about the gold market – not only about the link between the Goldilocks economy and gold, but also how to successfully use gold as an investment and how to profitably trade it. Great way to start is to sign up for our Gold & Silver Trading Alerts. If you’re not ready to subscribe yet and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

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