X-axis = sensitivity to inflation
Y-axis = sensitivity to economic growth
So, the further an asset is to the right, the more positively it has historically responded to inflation. The higher it is, the more positively it has responded to economic growth. The chart basically divides the economy into four environments:
🟢 Goldilocks — strong growth + low inflation
Equities and other risk assets generally tend to perform better here.
🟡 Overheating — strong growth + high inflation
Commodities, energy and other inflation-sensitive assets become more relevant.
🔵 Recession — weak growth + low inflation
Treasuries and higher-quality defensive assets tend to be more resilient in this environment.
🔴 Stagflation — weak growth + high inflation
And this is where the chart gets particularly interesting: Gold and commodities sit in this part of the chart.
Historically, gold has shown positive sensitivity to inflation and negative sensitivity to economic growth. In other words, an environment where economic growth weakens while inflation remains elevated can create a very different setup for gold compared with equities and bonds.
And I think that's the key takeaway: No asset is designed to perform well in every economic environment. The wrong question is simply:
“Are stocks good?”
“Is gold good?”
The better question is: What economic environment are we in, and which assets are historically better positioned for that environment?
That's why I prefer looking at asset allocation and different economic scenarios, rather than betting everything on a single asset. Of course, this chart isn't a forecast of the future. It's a historical view of how different assets have behaved across more than five decades.
Good investing isn't just about choosing an asset. It's about choosing the right mix of assets for different scenarios.
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@RezaMacroEdge