Gold Shakes Off Election

Gold has done well this year, as have gold stocks. Bullion is up about 30%, at $2,700/oz, and gold miners are also up about 30% based on the global gold miner ETF. However, following the election, there was a rather steep drop in gold prices, both in bullion and stocks. Gold dropped from around $2,800 to below $2,600/oz before recovering partially. Neither the drop nor recovery should come as a surprise if you look at positioning.

Heading into the election, which most thought was close and could very easily become a contested election, folks added to gold. Just in case things got weird or unsettling. Well, that didn’t happen, and it would appear there would be a smooth transition of power in the US. So right after the election, some of that fast money that was parked in gold,’ just in case,’ left. You can see this in the non-commercial futures position trends and in the money flows for gold ETFs.  

Magnifying this weakness in the yellow metal was a spike higher in the US dollar and a move higher in real yields. One could argue that gold broke the relationships between these two factors over the past couple of years. Gold moved a lot higher while real yields rose, and the dollar was rather flat. Looking at the following charts, these two factors don’t seem to support a gold price way up here. However, it is not the level that matters for these factors; it is their directional move. So when the US dollar strengthens and real yields rise, gold likely falls – keeping in mind there are many other factors as well.

We remain fond of gold exposure for a few key reasons: Crisis Alpha & USD hedge. Gold and gold miners have a very strong track record of providing a stabilization factor for portfolios during times of market trouble. One could say this is what bonds provide, but if the market trouble is caused by debt or inflation concerns, bonds often fall short. For us, having some gold diversification under these potential scenarios simply makes sense. We discussed this ‘crisis alpha’ view back in March (HERE) with some pretty compelling charts. Gold also provides a hedge in case the US dollar declines. Has not happened yet, but a risk.

This raises the question, without a crisis, with a strong US dollar, why is gold up at $2,700/oz? Central bank buying has helped, with more and more wanting to diversify their holdings. And then there is inflation. Gold, as a true real asset, provides a hedge against inflation risk, which is one of the factors that has driven the price up over the past few years. We do believe inflation may re-accelerate somewhat in 2025. Maybe even in Canada, too, given that while we are still fighting lingering inflation, the government has decided to give most citizens $250 and a tax holiday on such strategic consumer goods as children’s toys and booze.

In our view, gold is a part of a diversified defensive stack within a portfolio. This often leads to the question of miners vs bullion. Miners provide greater leverage, but during risk-off events, they can be weighed down by being more equity-related. Miners may be a little more attractive at current prices, but not materially so. Back in February/March, there was a very wide discount, which has largely closed. Of course, if investors ever get excited about gold miners, they can be pushed up much more than bullion.

Finally, let’s talk valuations. You can’t really value the price of gold, as one of my favourite strategists once said – gold’s valuation formula is 1/T, where T is trust in the system. So, do you think T (trust) will rise or fall in the coming years? Most likely, think less T, which helps provide support for some gold exposure. 

At the company level, of course, there are valuations, and we have historically not been fans of valuation approaches to this space. Mainly because gold is influenced by more macro factors, causing valuations to fluctuate as a result. That being said, in the chart below, it is interesting that peaks in gold mining companies often coincide with rather high valuations. That is not the situation today, as profitability has increased faster than the share price appreciation, resulting in falling valuations.

Final Thoughts

Gold exposure certainly isn’t for everyone, as many investors carry some scars from this space. However, gold does provide a rather unique kind of defence for a portfolio that may be needed if inflation picks back up, or the bond market loses faith in government, or the US dollar moves into a downward trend after going up for a decade +.

— Craig Basinger is the Chief Market Strategist at Purpose Investments

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Sources: Charts are sourced to Bloomberg L. P.

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