Tariffs and rumors of tariffs are driving the markets right now. But is there something bigger going on? Are tariffs just one plotline within a bigger story?
In this episode of the Money Metals' Midweek Memo, host Mike Maharrey puts the current market chaos into context, zooming out to focus on what he believes is a much bigger narrative.
He argues that the stock market is a big fat bubble just waiting for a pin. Tariffs might be that pin. But even if they're not, there's a pin out there. Mike explains how we got to this place, focusing on Federal Reserve monetary policy and the broader boom-bust business cycle using the Dow-to-Gold ratio as a map to the broader narrative.
Mike opens the show by reminiscing about a plot twist in the original Star Wars trilogy. There was romantic tension between Luke Skywalker and Princess Leah - up to the point we learned that they were brother and sister.
"It was a story within a story, right? You saw one thing evolving, but you really didn't have enough information early on, or you were missing things early on that were kind of twisting the story, so to speak. So, what does this have to do with gold, or silver, or markets? Well, I think there is a bigger story that the whole tariff thing is working within right now. And I think we need to talk a little bit about the bigger picture while everybody else is focusing on this ongoing tariff narrative."
Mike notes the extreme volatility in the markets right now, pointing out that the VIX volatility index is approaching levels last seen in the early days of the pandemic.
"The only thing certain is uncertainty. And do you know what markets hate? Uncertainty."
Mike points out how difficult it is for business people, entrepreneurs, and investors to plan when the ground shifts every few hours.
Of course, every eye is on the trade war, but Mike says he thinks there is a bigger picture some people might be missing.
"I’m not minimizing the trade war. It’s undeniable that the aggressive tariff regime certainly triggered the sudden and sharp downturn in the stock market. But is something deeper going on? I think there is. The big sell-off in response to tariffs is just one chapter in a much longer novel. A look at a metric known as the Dow-to-gold ratio hints at the larger narrative. In a nutshell, the stock market is historically overvalued. In other words, it is a bubble. And one thing we know about bubbles is that they eventually pop. All it takes is a pin. Tariffs might be the pin. But even if stocks manage to regain their footing, another pin is out there."
Mike builds his case using a metric known as the Dow-to-gold ratio.
"The Dow-to-gold ratio prices the Dow Jones Index in ounces of gold. Currently, the ratio stands at just over 12.5-1. In other words, it would take around 12.5 ounces of gold to 'buy' the Dow. This ratio is starting to break down. ... What we find is that historically, a falling Dow-to-gold ratio precedes or coincides with financial crises or long-term bear markets."
Mike walks listeners through the recent history of the Dow-to-gold ratio, showing how it has expanded during economic booms fueled by Federal Reserve easy monetary policy and then contracted during the bust.
"The relationship between Federal Reserve monetary policy and the Dow-to-gold ratio underscores an important fundamental - the stock market is subject to inflation just like consumer prices. In fact, monetary inflation often shows up in equities first. In a nutshell, central bank money creation tends to blow up asset bubbles."
Mike argues that the stock market has been a bubble for years - really since the easy money years during the Great Recession.
"I have been saying for years that the stock market is extremely overvalued, thanks to the Fed's monetary malfeasance. It is a bubble waiting for a pin. It started to deflate in 2018, but the Fed was able to use the pandemic as an excuse to pump the air back in. Now, it may have found its pin in the Trump tariffs."
This is extremely significant for gold and silver.
"If history is any indication, the sudden drop in the Dow-to-gold ratio could be signaling the beginning of a massive selloff in stock and a major rally in gold. The recent breakdown of this ratio may signal that it's time to consider getting out of stocks and into gold. Even if Trump backs off the aggressive tariffs and provides some relief for markets, it won't change the fact that stocks are overvalued. We still haven't dealt with the ramifications of well over a decade of artificially low interest rates and multiple rounds of QE. We will."
Mike runs some hypothetical numbers showing just how much gold could rise to drive home his point.
"And don't forget that silver typically outperforms gold in the latter part of a gold bull market. With the gold-to-silver ratio over 100-1, we know that silver is significantly undervalued compared to gold and set up for a major gain. So this extremely high gold-to-silver ratio suggests one might be overweight to silver in comparison to gold."
Mike concedes he doesn't have a crystal ball. Nobody does.
"Trump could relent on tariffs tomorrow and set off a relief rally in stocks. But it won't change the fact that the market is a 'big, fat, ugly bubble,' to quote Donald Trump in 2016. Today, the bubble is bigger, fatter, and uglier. Smart investors are positioned for that reality."
Mike closes the show by posing a question: Given the circumstances, don't you want to have real money? If so, now is the time to call 800-800-1865 and talk to a Money Metals' precious metals specialist.
Articles Mentioned in the Show
Why Gold? The Russian Case Study
Why It Isn't Too Late to Buy Gold
About the Author
Mike Maharrey is a journalist and market analyst for Money Metals with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida.
