Source: China Securities Co., Ltd.
Authors: Ding Luming, Chen Yunyang

In the past 2 years, US stocks and gold have surged simultaneously.

Since 2023, usa stocks and gold have risen simultaneously. Since 1968, there have only been 6 cases of usa stocks and gold rising together for at least 2 years: 1970.5-1973.1, 1978.4-1980.9, 1985.2-1987.8, 2003.3-2007.10, 2009.3-2011.9, 2016.2-2020.8. During this period of usa stocks and gold rising together, when we divide the usa economic status based on the year-on-year GDP and CPI of the usa, the usa GDP and CPI resonate downwards, similar to the economic status during 1985.2-1987.8.

The common driving factor behind the simultaneous rise of US stocks and gold: liquidity surge.

During the past 6 periods when usa stocks and gold rose together, the usd index fell. It is evident that the common factor behind usa stocks and gold rising together is a weak usd rather than low interest rates. During the phase of the fed raising rates and reducing its balance sheet in 2023, why is there sufficient liquidity? We believe there are two possible reasons: (1) Non-us central banks cut rates before the fed, causing a global liquidity spillover effect that boosts usa stocks and gold. (2) Liquidity released through other means in the usa offsets the fed's balance sheet reduction, leading to substantial liquidity easing.

The scale of U.S. bond issuance is shrinking, and by 2025, U.S. stocks and gold may end the same rise with a resonant adjustment.

When will U.S. stocks and gold end the same rise? Three important observational variables: (1) The end of the rise of U.S. stocks and gold often coincides with the turning point of the U.S. core CPI. (2) The reversal of the downtrend in the U.S. Dollar Index. (3) The potential labor productivity in the United States often bottoms out and rebounds.

Future outlook: The scale of U.S. bond issuance is shrinking, and by 2025, U.S. stocks and gold may end the same rise with a resonant adjustment. If we take into account the status of GDP and CPI, this round of simultaneous rise of U.S. stocks and gold is similar to 1985.2-1987.8, but the post-rise state will be different. In July of this year, the U.S. unemployment rate continued to rise, triggering the Sam Rule. In September, the U.S. fiscal deficit was the lowest in the past 4 years. The latest data from the U.S. Treasury Department estimates that the net issuance of U.S. bonds in Q4 2024 is expected to decrease to $546 billion, and in Q1 2025 it is expected to be $823 billion. The pattern of fiscal expansion in the United States since 2023 is difficult to sustain. Therefore, the core factors that drove the rise of U.S. stocks in the 1990s will no longer apply this time. The U.S. economy and inflation rely on borrowing money this time. After losing fiscal assistance, we expect the U.S. economy to accelerate its decline in 2025, the liquidity of the U.S. Dollar to reverse, and the resonance rise of U.S. stocks and gold over the past 2 years due to liquidity expansion to reverse. We recommend observing the changes in the net issuance of U.S. bonds and the U.S. job market to make the corresponding right-side confirmation. From the perspective of potential labor productivity, the CBO predicts that the potential labor productivity in the United States will reach a low point in 2025, at which time U.S. stocks and gold may also end the same rise. Combining our judgment that the unsustainable pattern of U.S. fiscal expansion, in 2025 the U.S. output gap will turn downwards, eventually causing a resonant adjustment in U.S. stocks and gold.

1. Over the past 2 years, U.S. stocks and gold have risen in tandem.

Since 2023, U.S. stocks and gold have risen in tandem, as of October 29, 2024, the s&p 500 and comex gold have both risen by 52%. A risk asset and a traditional safe haven asset rising in tandem for almost 2 years is rare in history. We have summarized at least 2 cases since 1968 where U.S. stocks and gold have risen in tandem for at least 2 years, historically only 6 times: 1970.5-1973.1, 1978.4-1980.9, 1985.2-1987.8, 2003.3-2007.10, 2009.3-2011.9, 2016.2-2020.8.

If we divide the economic status of the United States based on the year-on-year comparison of U.S. GDP and CPI, in the past 6 rounds of simultaneous rise of U.S. stocks and gold, 2 rounds were characterized by GDP and CPI resonating upwards (overheating), 2 rounds with GDP declining and CPI rising (stagflation), 1 round of GDP and CPI resonating downwards (recession), and 1 round with GDP rising and CPI falling (recovery). During this round of simultaneous rise of U.S. stocks and gold, U.S. GDP and CPI resonate downward, with the economic status similar to 1985.2-1987.8.

2. The common driving force behind the simultaneous rise of U.S. stocks and gold: Surging liquidity. As U.S. stocks, a risky asset, and gold, a safe haven asset, rise together, they are mainly driven by liquidity, which is not necessarily achieved through Fed rate cuts, for example during the U.S. rate hike period from 2004-2006, U.S. stocks and gold still rose together.

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When measuring the liquidity of the US dollar through the US Dollar Index, in the past six periods when both US stocks and gold rose together, the US Dollar Index fell, with an average decline of 15.9% and a median decline of 9.7%. It can be seen that the common factor behind the simultaneous rise of US stocks and gold is a weak US dollar rather than low interest rates. In 2023, the price of gold significantly deviates from the actual interest rate, and is highly negatively correlated with the US Dollar Index.

During the phase of the Federal Reserve's interest rate hikes and balance sheet reduction in 2023, why is there loose liquidity? We believe there are two possible reasons:

(1) Non-US central banks cut interest rates ahead of the Federal Reserve, leading to a global liquidity overspill effect boosting US stocks and gold. This round of global interest rate cuts differs from the past, with non-US central banks cutting interest rates first and the Federal Reserve following later. If we measure global liquidity by the proportion of net interest rate cuts by global central banks, then at the beginning of 2023, the most tense moment of global liquidity has already passed, liquidity is marginally loose, aligning with the simultaneous rise of US stocks and gold.

In addition, over the past 2 years, the trend of Chinese government bond futures has been basically the same as that of US stocks and gold, while US bonds have somewhat decoupled from the two, which may also be a manifestation of liquidity overspill, with some of the ample domestic liquidity entering overseas assets like US stocks and gold.

(2) Other liquidity released through other channels in the US offsets the Federal Reserve's balance sheet reduction, resulting in substantial loose liquidity. In 2023, with the Federal Reserve's interest rate hikes and balance sheet reduction, if we follow the experience of the 2018 interest rate hikes and balance sheet reduction, both US stocks and gold should have fallen. However, asset prices show a state of loose liquidity in a high-interest rate environment. The deviation between liquidity and price behind this may be that other liquidity released through other channels in the US offsets the Federal Reserve's balance sheet reduction, with the most discussed aspect being the decline in the size of reverse repurchase agreements in the US, which indirectly released liquidity to the financial markets, offsetting the Federal Reserve's balance sheet reduction. This can be seen from the trend of base money, with the growth rate of US base money rising from its lowest point of -15.7% in December 2022 to 10.8% in February 2024.

However, after February 2024, the growth rate of US base money dropped from its peak, yet US stocks and gold continued to rise together, indicating other domestic sources of funds in the US are still boosting liquidity. Looking at the US real estate market, with loan rates of 6% to 8% already at their highest in the past 15 years, house prices are still rising. Similar instances of the deviation between liquidity and price appeared during two periods of simultaneous rise in US stocks and gold in the 1970s.

Furthermore, the share of the US dollar in global foreign exchange reserves is an indicator of US dollar credit. This indicator has been closely aligned with the trend of the US Dollar Index over the past 25 years. However, in the past 3 years, there has been a noticeable divergence between the two, with the US Dollar Index moving up to around 100, while the global share of the US dollar in foreign exchange reserves has been declining. Comparing the trends between the global share of the US dollar in foreign exchange reserves and the gold price, we can observe that the trends of the two are also closely aligned, indicating that the US Dollar Index in recent years cannot fully explain the trend of weakening US dollar credit. Liquidity released by the US itself is more abundant than shown by interest rates and the US Dollar Index.

The simultaneous rise of US stocks and gold often accompanies a potential decrease in labor productivity and an increase in output gap. The so-called 'buy gold in troubled times' often occurs late in the period after the end of the previous generation's technological dividend, when the global economic pie is shrinking and contradictions are more likely to intensify. Therefore, the trend of gold prices is fundamentally opposite to the potential labor productivity in the US. The rise in US stocks relies on the mid-cycle of the economy, which is the rise in the output gap. Therefore, the simultaneous rise of US stocks and gold often comes with a combination of a decrease in potential labor productivity and an increase in the output gap. The simultaneous rise of US stocks and gold since 2023 is a combination of a decrease in potential labor productivity and an increase in the output gap.

The scale of US debt issuance is shrinking, and the US stock gold may end the simultaneous rise by resonance adjustment in 2025.

Historically, the ways in which the US stock gold ends the simultaneous rise are not uniform. Out of 6 instances, 3 ended with both falling, 2 with gold price falling and US stocks rising, and 1 with gold price rising and US stocks falling.

So when will the US stock gold end the simultaneous rise? Three important observable variables: (1) The end of US stock gold simultaneous rise often coincides with a turning point in the US core CPI, which can be either a bottom or a top. (2) Reversal of the downtrend in the US dollar index. The end of the US stock gold simultaneous rise often accompanies the US dollar index transitioning from a downtrend to an uptrend or sideways oscillation, in short, a reversal of the downtrend. (3) US potential labor productivity often hits a trough rebound.

From the perspective of inflation status, during this round of US stock gold simultaneous rise, the US inflation status is similar to 1970.5-1973.1. In 1970, the US entered the downward phase of the first wave of major inflation, the downward turning point in the core CPI corresponded to the beginning of US stock gold simultaneous rise, which is similar this time as well. In early 2023, the US core CPI established a downward turning point, and US stocks and gold rose simultaneously.

If we refer to the experience of 1970.5-1973.1, the second wave of major inflation in the US began in 1973, and US stocks and gold ended the simultaneous rise. It indicates that during a period of high inflation, a downward inflation trend implies relatively loose marginal liquidity, and vice versa is a tightening of marginal liquidity. So, when will both end the simultaneous rise this time? An important observable indicator is the trend of US inflation.

Looking ahead: The scale of US debt issuance is shrinking, and the US stock gold may end the simultaneous rise by resonance adjustment in 2025.

As mentioned earlier, if we consider the status of GDP and CPI, this round of US stock gold simultaneous rise is similar to 1985.2-1987.8, but there will be some differences after the simultaneous rise ends. From the perspective of US dollar liquidity, based on the experience of liquidity outflow in the 1990s, Japan's reversion of liquidity outflow to the US occurred when the US economy began to weaken due to accelerated economic slowdown, as the relative advantage of the US economy would start to narrow significantly, leading to the core logic of liquidity outflow reversing. US economic data has been resilient since 2023, while other economies are relatively weak. However, in July of this year, the unemployment rate continued to rise triggering the Sam Law, and in September, the US fiscal deficit was at its lowest level in the past 4 years, with the latest projection from the US Treasury Department estimating a decrease in the US net debt issuance scale to $546 billion in 2024 Q4, and $823 billion in 2025 Q1, making it difficult to sustain the pattern of US fiscal expansion since 2023.

Therefore, the core factors that drove the rise in US stocks in the 1990s will not apply this time. The US economy and inflation this time rely on borrowing for sustenance. After losing fiscal support, we expect the US economy to accelerate its downturn in 2025, with a reversal in US dollar liquidity. The resonance rise in US stocks and gold over the past 2 years due to liquidity expansion will reverse. We recommend observing changes in US bond issuance and the job market to make corresponding confirmations on the right side.
At the same time, looking at the potential labor productivity, the CBO predicts that the potential labor productivity in the USA will reach a low point in 2025, by then the US stock and gold may end the simultaneous rise, combined with our judgment that the unsustainable nature of the US fiscal expansion model, the US output gap is expected to turn downward in 2025, ultimately leading to a resonant adjustment in US stocks and gold.

Risk warning

The results of this report are all based on the corresponding asset class pricing models, and the risk of model failure should be monitored; the past does not indicate the future, and the risk of historical patterns no longer repeating should be noted; the model results are for research reference only and do not constitute investment advice; the ongoing overseas conflicts need to be monitored since large-scale escalation of regional conflicts is still a risk; the earlier rapid interest rate hikes in the USA, coupled with the relatively resilient US economy, call for caution regarding the future weakening of US fiscal stimulus combined with the delayed impact of substantial rate hikes earlier; the future inflation center has shifted higher compared to the past 10 years, hence the risk of US bond rates remaining high in the long term should be monitored. Currently, the Chinese economy is influenced by both domestic and international factors, hence the risk of lower-than-expected domestic economic growth needs to be monitored.

Editor/rice