Bloomberg Intelligence
This analysis is by Bloomberg Intelligence Senior Commodity Strategist Mike McGlone. It appeared first on the Bloomberg Terminal.
Harnessing energy and commodities is part of the advancing human condition, but gold vastly outperforming crude oil and most risk assets in 2025 could augur the limits of US stock-market wealth creation. Or will the S&P 500 regain an inordinate burden of lifting all boats? Our bias is with Bloomberg Economics and Intelligence for a potential 30% drawdown in the index in the case of a recession. If beta’s going down, it can be all that matters, especially with commodities showing global contraction leanings before the US election.
Gold has reached a good threshold at $3,500 an ounce, but crude’s low-price cure might stick with the pattern since 2008 toward $40 a barrel. Grains could require a Corn Belt drought to not drop more. Copper has been an optimistic economic outlier, but we see greater risks of following crude.
What stops the deflation?
A Great Reset is happening in gold, commodities – what stops it?
Record-setting gold could be front-running a global recession on the back of falling crude oil, government bond yields in China and Europe leaning into recession. What stops overdue reversion from multidecade highs in the US stock market vs. GDP, commodities and the rest of the world might be a crucial question for 2025.
Commodity deflation trickling down from China
A gain of about 6% in 2025 for the Bloomberg Commodity Spot Index (BCOM) to April 28 vs. a similar decline for the S&P 500 are minor movements, yet both face downward pressure if the US enters a recession that didn’t come in 2023. Our graphic shows what could be the start of reversion lower in the S&P 500 vs. BCOM and US Treasury 2-year yield from 2024’s multidecade highs, if deflation in the largest commodity importer and goods exporter is a guide. The Chinese government 10-year yield at 1.63% is about 200 bps below the US 2-year on April 28 vs. closer to 260 bps at the start of the year.
Deflationary forces in China appear to be trickling down as markets anticipate Federal Reserve easing. Sticky inflation on the back of the rapidly rising US stock market could have reached its limits on a path toward a low-price cure.
What stops falling US stocks, dollar vs. gold?
Gold, the dollar and S&P 500 vs. the MSCI Ex-US Index have been on similar upward paths for about a decade and appear ripe for some reversion, which might favor the metal. Stretched US exceptionalism is a takeaway from our graphic showing the S&P 500’s nearly straight-up track vs. the rest of the world since 2008. Did reaching 2x US stock-market cap-to-GDP mark an apex akin to 1929 and 1989 in Japan? It might be a question of a worthy catalyst for normalization and Trump administration policies appear ample.
US tariffs and austerity coming at a time of accelerating deflation from China could pressure US corporate profit. Not since the 2008 financial crisis has the world faced an enduring ebbing US stock-market tide. Unless US stocks can keep rising from the highest ever vs. the rest of the world, gold might take the medal.
Gold, commodities show recession, except copper
The path of gold outperforming most commodities and risk assets in 2025 existed before the US election, suggesting trend endurance. Our performance dashboard shows the precious metal up about 27% this year to April 29, crude oil down 15% and copper’s relative resilience. Buoyed by US tariffs, the economically sensitive metal at about $4.80 a pound could face elevated risks of reverting toward $3 vs. staying above $5, especially if Bloomberg Economics and Intelligence are right about the potential for a 30% drawdown in the S&P 500 in the case of a US recession.
The economic contraction that didn’t happen in 2023 is gaining traction this year, but from a much higher plateau in US equity prices. Gold reached a good threshold at $3,500 an ounce, which may be front-running a global slowdown.
Deflation track – rising gold vs. most commodities
A key question from commodity sectors’ performance with precious metals on top and energy at the bottom is the endurance of recessionary trajectories. Best-performer gold — this year and on a one- and two-year basis vs. the opposite for energy — show deflation from the inflation to 2022’s peaks. What stops these trends is a key question for the rest of 2025. Our bias is to expect plenty of volatility, especially if US equities have entered a bear market, which is Bloomberg Intelligence’s scenario.
A final remaining global force for deflation — on the back of plunging government bond yields in China and Europe leaning into recession — could be the US stock market giving back some of its extraordinary gains. From 1968-2013, the S&P 500 averaged under one-to-one vs the MSCI Ex-US index. Now it’s over two-to-one.
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