When stocks crash, bond yields may go down, thus increasing bond prices. If yields are very low then investors may feel they have nothing to lose by owning gold, which has no yield, thus in a stock crash both gold prices and bond prices may rise together.

If someone is bearish about stocks then one may decide to buy gold and bonds so as to benefit from a stock crash. It is far less risky to own unlevered gold and bonds than short-selling stocks and there are minimal carrying charges for gold and none for bonds.

However sometimes bond investors are early to the party in terms of wanting to be bearish about stocks. The bond market tends to anticipate recessions several months sooner than stocks. Thus if too many stock bears decide to express their bearish views by buying gold and bonds they could increase the price of these assets somewhat too high and too early. Then when the stock crash comes the hoped-for reward is not forthcoming because the price of bonds and gold may have already gone up by an appropriate amount that represents a discounting of future value.

If a mild recession comes and is followed by significant inflation then gold might go up more. If there is no additional inflation, because the economy is constrained by excess debt (see Lacy Hunt’s writings), then gold may already be fairly valued today at the $1,500 approximate level.

The challenge of the era is that since central bank Quantitative Easing was new and untested there is no easy way to know what will occur. Preliminary reports indicate the program is actually deflationary as it soaks up high yielding bonds and forces retirees to suffer retirement with lower income, thus retirees react by reducing consumption; while near retirees save more, work longer and thus increase supply of labor and reduce consumption, which are deflationary. The QE programs have mainly resulted in cash getting stuck in a loop (where only very rich investors and banks get to hold the cash from QE and the banks are forced to hold it in in reserve so they can’t use it) and not going to stimulate the economy, thus not causing inflation. But a QE that is designed solely to finance a fiscal program, where fiscal policy is in the driver’s seat hasn’t been tested. Its outcome would depend on how intense and rapid is the deployment of the program. If it is wimpy and tepid then nothing will change (except the deficit would get bigger); if it is huge and fast with EPA waivers allowing rapid construction of public works projects then it would cause inflation.

Assuming many workers in Developed countries are underpaid and experiencing the threat of loss of jobs to EM countries then this may result in a political push for fiscal deficit financed stimulus (such as MMT) which could be monetized by central banks. Also a central bank financed debt jubilee could be used to stimulate the economy. This could result in an unanticipated increase in inflation, thus making gold go up, while bonds languish. TIPS bonds, which are inflation adjusted, could be useful but if the fed tightens and raises the “real” rate the TIPS bonds real rate would not be adjusted by the issuer, causing it to drop in value. Assuming a world of excess stimulation and excess debt then the fed may not want to tighten and would instead hold rates down, thus TIPS would be useful.

I estimate that with Senate filibusters, the Byrd rule, and U.S. bureaucratic rules, that any massive public works fiscal stimulus program will be implemented very slowly and in a very wimpy manner. After all, before you can build a freeway you have to go through the permitting, eminent domain, and eviction process. One freeway project in Pasadena has been stalled for 50 years due to lawsuits. It was quick and easy for Congress to authorize the Treasury in 2008 to issue a TARP loan to ten giant banks, but very hard to do a massive make-work construction project.

   Investors need independent financial advice about the risks of gold and bonds.