Plummeting Consumer Sentiment Supports Gold

Gold bull markets are correlated with secular drops in consumer sentiment. Today’s sentiment numbers will help support gold’s next move.

Key Takeaways:

Home construction and factory production are both decreasing, signaling a broader economic slowdown and raising the risk of recession.
Consumer sentiment hit an all-time low this month – blowing past previous lows during the Great Financial Crisis, Gulf War Recession, and 1970’s stagflation.
Consumer sentiment peaked in 2018. Since then, gold has risen 60%. Will this trend continue?

Consequences

It’s a bad time to be a central banker. The everything bubble is deflating, and now we must face the consequences of an economy built on free money. When policymakers engineer a boom, they only delay the inevitable bust.

Central banks are now taking drastic actions to lift the economy through an environment where nothing seems to be going right. Home construction and factory production are slowing, consumer spending is decreasing, inflation is climbing, stocks are plummeting, and consumer sentiment just hit all-time lows.

Consumer Sentiment

Let’s focus on that last point: consumer sentiment just hit all-time lows. The University of Michigan has been measuring consumer sentiment every month since 1952. This month, the UMich consumer sentiment index came in at 50.2. Over the last 70 years, the consumer sentiment index has averaged 86.24.

The previous low of 51.7 occurred in 1980. At this time, the United States was coming out of a decade of dismal stock market returns, low economic growth, and high inflation. CPI was sitting at 15%. The Fed had to raise rates to nearly 20% to bring inflation under control.

Even during the Great Financial Crisis, consumer sentiment only reached 55. Typically you would only expect numbers like this during severe recessions. Home buyer sentiment also reached an all-time low, amid constricted supply and skyrocketing prices.

Impact on Gold

Gold tends to perform very well when consumer sentiment is low. The last two secular bull markets in gold (1970-1980 and 2001-2011) both occurred when consumer sentiment was on a secular downtrend.

Consumer sentiment has been in a downtrend since 2018. Since that time, the gold price has risen 60%. If consumer sentiment keeps dropping or stays at current levels, gold will continue to perform very well. Compared to the previous gold bull markets, the most recent 5-year rally has been relatively mild.

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