Will goldilocks ever come back? One day maybe but not now.

With a month and 2 days into 2010, the relationship over the past 10 years between stocks and gold remain on track and that is stocks are only making nominal gains and not real as gold continues to outperform. Gold bottomed in 1999 just a few months before the Fed embarked on their rate cutting cycle that took the fed funds rate to 1%. In the decade that followed gold rallied throughout while the S&P 500 fell 24% (not including dividends). In gold terms in the last decade, the S&P 500 lost 66% of its value. In 2009, the year of recovery, the S&P 500 was up 23.5% but gold was up 24%. Year to date, the S&P 500 is down 1.5% but gold is up 1.7%. I highlight this to point out that the markets don’t believe that the US economy can have a strong growth, low inflation type recovery that characterized the ’80s and ’90s and that any recovery now will come with the specter of inflation and an unaccommodating interest rate environment if so.

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