If you believed the bond market was the only casualty of monetary excess, look at equity markets. The S&P 500 is flirting with record highs, yet the advance is precariously narrow. Valuations on megacap technology firms evoke memories of the dot‑com bubble, while underlying economic indicators flash amber. Margin debt, where money investors borrow against their brokerage accounts, has exploded. Data compiled by FINRA and highlighted by Wolf Street show that margin debt surged by 8.3 per cent in May and 9.4 per cent in June, jumping by $87 billion to a record $1.01 trillion. Previous spikes of this magnitude occurred in December 1999 and May 2007, both preludes to market crashes.
Signs of froth are everywhere. Citi’s Levkovich Panic/Euphoria index recently climbed to 0.65, well above the threshold that historically precedes poor equity returns. Crypto‑friendly lending platforms are issuing unbacked micro‑loans to people in developing countries, reminiscent of microfinance on steroids. Meme stocks and speculative initial coin offerings are back with a vengeance. This is not exuberance; it is denial disguised as optimism.
At the same time, the real economy shows strain. U.S. energy firms have cut drilling rigs for 12 of the last 13 weeks, leaving the total rig count 8 per cent below last year’s level. Such contractions foreshadow slower output growth and higher energy prices. History tells us that supply squeezes in energy combined with lax monetary policy breed stagflation, simply a toxic mix of high inflation and low growth.
Wage earners are ill‑equipped to handle this. Pew Research points out that the purchasing power of the average hourly wage has barely changed in four decades. Meanwhile, asset inflation continues: the top 1 per cent hold about half of all equities, and the bottom half of households hold just 1 per cent. When the Federal Reserve raises interest rates, it hurts mortgage affordability for the middle class; when it cuts rates, it inflates the very assets concentrated in elite portfolios. The result is a “tale of two economies”: paper wealth and speculative gains on one side; stagnant wages and rising living costs on the other.
The appetite for risk is not being driven by fundamental confidence in productivity growth; it is a side effect of abundant liquidity and the hope that someone else will pay a higher price. That hope can evaporate quickly. Many investors sense this. Google searches for “gold” are at record highs, according to search analytics. The World Gold Council reports that 95 per cent of central bankers expect gold reserves to keep rising and Reuters notes that official-sector purchases remain around 1,000 tonnes a year.
Why gold? Because it offers insurance against two opposing outcomes that are both plausible: inflationary melt‑up and deflationary bust. In an inflationary melt‑up, the value of currency erodes and real assets like gold rise. In a deflationary bust, debt burdens become unmanageable, prompting further monetary intervention and loss of confidence in fiat money. Gold has no counterparty risk, no default risk and a long history of holding value when other assets fall.
Investors should not view gold as a speculative trade but as disaster insurance. In a diversified portfolio, even a modest allocation (say 5 to 10 per cent)can provide a hedge against both stagflation and financial crises. This is not about predicting the price of gold tomorrow; it is about recognising that the current speculative frenzy, combined with weakening fundamentals, is unsustainable.
The broader lesson is that extreme market behaviour often precedes extreme market corrections. When margin debt surges and sentiment reaches euphoric highs, caution is warranted. When energy supply contracts and wages stagnate, the seeds of stagflation are sown. And when central banks themselves turn to gold, it is a sign that our monetary system is in flux.
In such a world, holding a portion of your wealth in physical gold is a sensible response to uncertainty. Not because gold will make you rich, but because it may prevent you from becoming poor. As markets gyrate between bubble and bust, and as governments oscillate between stimulus and austerity, gold quietly endures. It may not pay interest, but neither does it require trust in the solvency of anyone else. In today’s speculative and uncertain environment, that is a rare and valuable attribute.
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