For those of you who have read my work over the years, you know that I am a believer that commodities are destined for long-term scarcities and much higher prices. I believe that gold will outperform other assets, as it has since the calendar flipped to 2000. The emergence of China and the rest of the development world plays a big part in the equation.

The COVID-19 pandemic has sapped growth around the world, but has it changed my expectations?

No, quite the opposite.

Acceleration of Scarcity

In the end, the pandemic will likely accelerate the timeline for commodity scarcities. At the same time, it has strengthened China’s relative position and its ability to achieve its goals, including a gold-backed monetary system, with the West less able to push back. Both these developments are highly bullish for gold.

The pandemic has drastically cut into growth. But that’s for now. Growth is going to pick up again, both in the East (where it’s already starting) and in the West, which virus or no virus can’t afford to slip ever further behind.

The resumption of growth means the current sharp slowdown in demand for commodities is short term. But for supplies it’s a different story. Revving up global commodity production will take a lot longer. In fact, production may never return to former levels. That demand/supply imbalance is one reason to expect commodity prices to rise. Another is China’s resilience in the face of the pandemic.

The West Hit Much Harder

For whatever reason, COVID-19 has been far less damaging to China’s economy and to most other Asian economies than to the West. To give just one striking statistic, coronavirus-related deaths in New York State are more than 10 times the combined number in 10 Eastern developed democracies. (New York’s population is about 19 million and the aggregate population of the democracies are around 260 million.)

By developed democracies, I’m referring to such countries as Japan, Australia, South Korea, etc. I left out China or India due to questions about the accuracy of their reported figures. If those countries were included, the comparison to the West would be even more in the East’s favor.

The East Left in Better Shape

It doesn’t really matter what explains the huge differential. The reasons could include that the East was better prepared; had a greater familiarity with dealing with lethal coronaviruses; has healthier behaviors and climate factors; or dealt with a less deadly virus strain. What matters is the result.

The East has been left better positioned to gear up growth more quickly and more assuredly. And that’s huge, because the emerging economies of the East, with their far lower per-capita incomes, are trying to catch up. This effort will require massive amounts of commodities of all kinds.

The stock market has clearly signaled its confidence that growth will follow the sharpest economic decline on record. But as I noted above, that growth will focus on demand, not supply. The damage that has been done to supply chains in the U.S. and elsewhere virtually ensure that forthcoming strong growth, perhaps just a few months away, will lead to more inflation than we have seen in quite a while.

Implication for Gold

Gold, remember, is both a commodity and a currency. When commodities overall are rising, gold participates in that rise. But its additional role as a currency supercharges its rise, pushing it to the fore.

In divining gold’s future path, the shorthand phrase I’ve coined is “gold or Goldilocks.” You can have one or the other. You can have a so-called “Goldilocks” economy, in which growth is neither too fast nor too slow but just right. Under those circumstances, gold is a terrible investment. The 1990s are a quintessential example.

But lacking a Goldilocks environment, if you have deflation or inflation, you can expect gold to surge. In the 1970s we had both soaring commodity prices and two recessions. In 1973-75 a major economic downturn went hand in hand with inflation that, led by surging oil prices, reached double-digit levels. At the decade’s end, the consumer price index (CPI) hit 15%. For the decade, real returns on stocks were close to zero, while real returns on gold investments were close to 25%.

In analyzing these various numbers, it’s important to understand that not all types of inflation are the same. For example, if the CPI is running at 3% or 4%, a bit higher than the long-term average of 2.9%, that is not necessarily a negative for stocks and a positive for gold.

What matters is whether it’s rising commodity prices that are leading the way. Even lower CPI levels can mean the absence of Goldilocks if commodity prices are behind the rise in the CPI. That’s because rising commodity prices are much harder to control than other inflationary causes.

The U.S. has used a tremendous amount of its endowment of basic commodities. As a result, when commodities, for whatever reasons, whether political or economic, become scarce, we lose control of our economic fate, uncertainty rises, and financial assets sharply underperform gold.

I have talked about why gold could be a very profitable investment for the future. For additional trading ideas, my colleague Amber Hestla can steer you in the right direction.

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