From Equities to Commodities: Understanding Market Paradigm Shift

In the latest episode of Talking Trades, Kevin Wadsworth and Patrick Karim explore a concept that sits at the heart of long-term market positioning: paradigm shifts. While traders often focus on short-term noise, the experts outline why stepping back to understand major structural changes in the economic environment can dramatically influence long-term outcomes.

Discover more insights with Talking Trades, a weekly educational show hosted by industry experts Kevin Wadsworth and Patrick Karim of NorthStar & BadCharts, analysing the latest movements in the precious metals market.

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A paradigm shift occurs when the market transitions from one distinct environment to another. This shift typically follows profound changes in economic conditions, such as moving from high inflation to deflation, or from an equity-dominated cycle to a commodities-led era. While short-term traders may be focused on minutes or hours of price action, major structural shifts redefine how all timeframes behave.

The biggest mistake traders make is failing to zoom out. Without understanding the backdrop influencing market behaviour, even well-executed short-term strategies can struggle. The wider environment affects weekly, daily and hourly charts, shaping volatility, direction and risk.

The gold chart in US dollars, when viewed on a logarithmic scale, provides a compelling visual of this transition. The long-watched red resistance line, a structural barrier marking the boundary between eras, should be noted. As gold finally pushed through this line, it signalled more than a simple breakout. It represented a broad shift, backed by multiple indicators across markets.

This breakout aligns with a substantial weight of evidence pointing to a new environment emerging for precious metals. Cross-asset signals were flashing simultaneously, strengthening the case. This is not an isolated move but a structural change with implications extending well beyond gold.

While gold has already confirmed its breakout, silver remains just beneath its own long-term red resistance. A multi-decade cup-and-handle formation develops on the silver chart, a powerful pattern traditionally seen over shorter timeframes. Its appearance on such a large scale reinforces the magnitude of the potential move.

Based on the evidence, silver is expected to eventually follow gold’s path. The size of the pattern suggests that once silver breaks out, the momentum could mirror the powerful rallies seen in historic commodity cycles.

Another major piece of evidence comes from the gold-to-S&P 500 ratio, which traces long-running cycles where either equities or gold take the lead. Each rising phase in the ratio signals a period where gold outperforms stocks, falling phases reflect the opposite.

The picture is strikingly clear. From around 1970, gold dramatically outperformed equities for a decade. Then came a long period when equities dominated. In the early 2000s, the ratio broke out again and commodities led markets for around 10 years. After a pullback favouring equities, the ratio now sits on the verge of another potential breakout.

Should this breakout occur on a monthly close, it would mark the beginning of a new cycle favouring gold and commodities over equities, signalling a major paradigm shift.

Perhaps the most powerful evidence of structural change comes from the US 10-year Treasury yield. Three major eras come to mind:

1. 1930s-1940s: Yields remained suppressed beneath what is called the “pain line.”
   
2. 1960s-1980s: Breaking above that line triggered high inflation, economic strain, and rising yields peaking near 16%.
   
3. 1980-2020: A 40-year trend of falling yields as debt-to-GDP climbed from 31% to over 120%.

During the pandemic period, yields briefly fell below support before violently reversing upward. This false breakdown followed by a breakout is a classic sign of a new long-term trend. The US now sits above the pain line again, marking a new paradigm where yields are no longer anchored by the downward trend of the past four decades.

Historically, when yields broke above this line, commodities, gold, silver, and energy significantly outperformed. Understanding this context helps traders identify which assets historically thrive during similar environments.

Identifying major structural shifts is essential for positioning effectively. When traders understand the backdrop, whether it is a commodity supercycle, a rising-yield era, or a shift away from equity outperformance; they improve their chances of aligning with long-term market direction rather than fighting it.

This broader perspective acts like choosing the right section of the roulette wheel before placing bets. It does not guarantee success, but it vastly increases the probability of being on the right side of major moves.

Ignoring long-term cycles can leave traders exposed to risks they never saw coming. By studying historical patterns, recognising transitions, and observing cross-market evidence, traders can better navigate shifts that shape markets for years at a time.