Growth Stocks Or Gold Miners?

December 31, 2021

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As Warren Buffett says, “Only when the tide goes out, do you discover who’s been swimming naked”.

The correlation between stocks and the Fed’s balance sheet over the last decade has been remarkable, but few investors talk much about the connection. Are investors unaware that to a great extent they are  liquidity speculators? I hope not. The Fed has committed to take balance sheet growth to zero in the next few months. If the correlation shown above holds the consequences for growth stocks could hardly be clearer.

“Implicit in today’s valuations is the assumption that the Fed can sustain simultaneous high liquidity and low inflation endlessly, which is impossible. There is a business cycle after all. Too much liquidity creates inflation which crimps the real economy. Too much inflation demands removal of liquidity which further catalyzes economic downturns.”

US money supply still explosive

US money supply surged again by $609 billion just in the last three months. That’s almost seven times its historic average. For the record, this is not a US-only problem. China’s money supply just increased by $840 billion in the last three months. Keep in mind that their highly inflated GDP still is 25% smaller than the US.”

Money supply also needs to be contained if inflation is going to return to low levels. This metric will also have to be watched to see how commited the Fed is to lower inflation. If you doubt the central bank’s anti-inflation perseverance then inflation could be a much more persistent problem. The coming tightening cycle will be a major test for the Fed following the record stimulus of the last 2 years.

The Trade of the decade? Gold Miners versus Growth stocks

Growth stocks are now challenged by cycles, valuation and the Fed pivot.

Just looking at software stocks, enterprise value to sales is now almost twice the 2000 peak level.

Also twice as many software stocks are still making losses relative to the 2000 peak. 

The Nonfarm payrolls data shows the scale of the multi decade secular shift in favor of technology while Natural resources are near their third major low in the last 60 years. Any reversal from these levels could be substantial.


Investors should consider that for well over a year the economy experienced very strong reflationary quad 2 conditions. This is great for growth stocks and bad for gold. However, quad 2 ended with 2021.

Policy is now turning less stimulative in 2022, and both inflation and growth are likely to reverse down.  Quad 4 currently has a 90% probability in Q2 2022. Gold does much better than growth stocks in quad 4, especially when policy is tightening.

There is significant risk of a continued broad sell off in growth stocks that may be accompanied by a significant rally in precious metals stocks. How the Fed responds will be a key factor but this is an important time to consider a significant  reallocation.

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