Gold has begun to appear in the headlines in recent weeks. I have never been a “gold bug”, one of those who attribute mystical, and rather silly, qualities to gold. My favourite blog on this silliness being Trigger’s Tip: Buy Gold. [Quick aside. As some of you guessed (!) Trigger was the office dog, though he retired pre-Covid. Sadly he died in the Summer in his beloved Hunstanton. He is sorely missed.]
Even so, it has been clear for some time that gold was stirring, so today I focus on gold, with a broader market review at the end.
For much of this commentary I lean heavily on G&R, see quote of the week. They are global natural resource specialists, and I thoroughly recommend their work if you want to get into the long grass of this sector. Their research is typically very detailed, and some might struggle with this. But it highlights the passion for their subject.
Their latest blog is fascinating with its historical perspective on natural resources versus the general stock market, all the more so as it is so timely.
The long term picture is that periods of commodity despair are invariably accompanied by a stock market mania, easy money, and a growing supply problem as capital is diverted away from unexciting new projects. In the last 125 years there were three such occasions: 1929,1969,1999. The G&R view is that we are again at one of those turning points. It certainly fits the historical playbook.
Nonetheless it is important to tread carefully. The volatility of commodities and commodity equities can both be greater than mainstream equities and provide limited downside protection midst the most extreme falls across financial markets.
For example, commodity equities fell 68% at worst between 1929 and 1937, whereas the Dow fell 89%. Sure the former outperformed – but that is little consolation when you are still nursing losses of 68%!
Within the commodity complex, it is gold which is now beginning to grab the headlines. As we said earlier in the year, the gold price was going up but very few were paying attention – this alone hinted at a buying opportunity. In fact until early Summer there had been persistent selling of gold ETFs. The point was that we were obviously only near the beginning of the upside. It is worthwhile understanding the extent to which gold equities massively underperformed vs the gold price for more than a decade.
Gold is edging towards another all time high at $2,600 as I write, and as G&R point out, gold equities have seldom been cheaper.
There was a huge gold bull market from 1999 to 2011, in tandem with commodities generally for the bulk of that period. The gold price went up 8x, and gold equities by 16x. It fell sharply between 2011 and 2015, and then a new bull run began, and gold is more than 30% above that 2011 peak.
But gold equities did not join in. The index for gold equities* is still 50% below its’s high in 2011. Why?
On the one hand some Western investors were persistent sellers of gold and gold equities when they could get decent real returns (after inflation) from bonds – this has begun to reverse in recent months. Plus, those of a speculative persuasion, who might ordinarily be inclined to punt into gold equities, were much more excited by a series of manias, from bitcoin to AI.
On the other hand, there have been big wholesale buyers of gold in town, the central banks, but they have no interest in gold equities. Hence the entrenched disconnect between the gold price and gold equities, which G&R have compellingly illustrated…
When you buy gold equities you are buying gold in the ground. At the lows of 1999, G&R calculate that gold equities traded at just 23% of the gold price. From this low in 1999, as mentioned above, gold equities rallied by a multiple of 16 to the peak in 1999…
…Earlier this year those same gold equities traded at just 12% of the gold price. Even cheaper than the low of 1991! No wonder G&R proclaim:
“The current opportunity is as compelling as any we’ve seen in the history of the gold market.”
The history of gold bull markets is that they end in a mania, and we are a long long way from that point.
Should you pile in now? The problem for those wishing to buy right now is the risk of a broadly based downturn in equities, as set out last week, and two lessons stand out from that history set eloquently by G&R:
- In extreme downturns (such as 1929 onwards) gold can provide little protection.
- For prolonged periods, gold equities can underperform the gold price, for example since 2011.
Be aware of these risks. If you are getting twitchy about being on board, consider drip feeding monthly. This should calm any FOMO in the short-term. Then if there are sharp downs in financial markets in the months ahead, the sort when all markets fall together irrespective of longer term attractions, look out for opportunities to buy.
The issue is similar for commodities generally. Although the current G&R theme is that investors risk missing out, my inclination is to focus on navigating the immediate risks, and this period will naturally throw out great long-term buying opportunities.
Over the last week gold was up 2.5% and gold equities 5-7%. The tech-centric Nasdaq index recovered 2.6% this week. It peaked back in July, and there is a debate as to whether that peak is terminal for tech, or whether another new high lies ahead – there should be a clear answer by the end of the Autumn.
European markets, including the UK, gained 1.5%-2% over the week. China was a dog, down 2.5%, and Brazil down 1.8%. Though we continue to hear positive feedback from those on the ground in China, there is simply not the domestic confidence to encourage Chinese investors to buy their own market.
With Autumn taking hold of weather and markets, expect more volatility.
*NYSE Arca Gold Bugs Index (HUI)