With gold up by around 100 per cent since 2019, signaling strong demand for its value preservation properties, it’s an opportune time for a refresher on what movements in the gold price tell us about macroeconomic conditions, and how these conditions might affect our current and future investments.
You can buy yourself an ounce of gold for US$2,309, plus the 3-5 per cent in expenses your provider tacks on for their services, as of 8:57 am ET on Wednesday, which is the highest it has ever cost since it became a freely traded asset in 1971. While this means that every past gold buyer is presently in the black, this hasn’t always been the case, given the shiny yellow metal’s volatile history.
How to use the gold price to become a better investor
1a. Looking to history, study the influencing factors behind gold’s upward price momentum
The current gold price is a sweet deal for investors who picked up ounces in the US$1,200s in 2019, after more than a decade of double-digit returns from the S&P 500, and the general public’s confidence in equities at a notable high, both of which made non-yielding assets such as gold seem unappealing.
Then came 2020, and with it the COVID-19 pandemic, causing countries to screech their economies to a halt, as the global population waited out the development of a vaccine from the comfort of their homes. Governments were forced to print more money to aid all the citizens and businesses no longer able to go about their daily to-dos, and in so doing, devalued their currencies at record rates, with 21 per cent of all U.S. dollars printed in 2020 alone.
The dwindling dollar made hard assets, such as gold and real estate, look incredibly attractive in comparison, sending gold from about US$1,400 when the pandemic hit the stock market in March 2020, to an all-time high of more than US$2,000 only six months later.
Uncertainty about high inflation and rising interest rates has since pushed the gold price past US$2,300, with a reasonable path to US$3,000 tied to imminent rate cuts lowering yields on competing assets such as bonds and savings accounts, increased militarization around the world, and high U.S. debt dampening the dollar’s status as a reserve currency, all of which are stoking the metal’s millennia of history as a store of value.
1b. Identify attractive areas for investment when gold is up, based on the market’s attitude towards value preservation
Gold rising to all-time-highs signals that risk-on sentiment, especially in the riskiest parts of the stock market, is likely at a pronounced low, resulting in pockets of undervaluation worth a deeper look.
We can put this thesis into practice by screening for small-cap and micro-cap stocks at 52-week lows to find quality operations that have been unjustly punished, despite their growth, profitability, or innovative research.
Readers should pay particular attention to gold mining stocks, which have a history of tracking the gold price, but have failed to do so over the past few years, with Sprott, Mining.com, Kitco and The Globe and Mail identifying generational risk-reward potential in the space.
Readers can also dive into recent and relevant Stockhouse content, including Three mining stocks that look cheap with gold at all-time highs, Three of the best small-cap value stocks to buy in 2024, and Three innovative stocks for the cutting edge of your portfolio.
2a. Looking to history, study the factors behind gold’s downward price momentum
As the world emerged from the Global Financial Crisis at the start of the 2010s, and investors recovered from more than 45 per cent drops in the TSX and the S&P 500, savvy allocators put capital to work at depressed valuations. This began what would become a more than 10-year bull market for stocks – from 2009 until the COVID-19 pandemic – marked by low interest rates and a rise in globalization spurring on business investment.
The global stock market would go on to average more than 20 per cent annual returns during the period, causing gold and its value-preservation qualities to be kicked to the curb. The gold price proceeded to drop from its previous all-time high of about US$1,900 per ounce in 2011 to about US$1,150 in 2019, as an increasing number of market participants followed the herd, putting their faith in stocks continuing their stellar performance.
2b. Identify attractive areas for investment when gold is down, based on the market’s attitude towards value preservation
When the price of gold is dropping, risk-on sentiment is probably on the rise, supported by a strong economy with robust demand and easily accessible capital, making it easier for companies to pursue growth and create shareholder value. Under this thesis, investors are more willing to suffer larger short-term losses for a chance at significant gains, and might even dip their toes into speculative assets with little to no record of operational performance.
To align ourselves with high-probability opportunities when gold is down, we can isolate the frothiest parts of the market for potential short sales, setting ourselves up to flip investors’ blind faith in companies likely to fail into a tidy profit.
Alternatively, we can screen for stocks trading at a discount to their past performance, in direct contrast to broader market fervor. Try setting price-to-earnings from 0.1 to 10, market capitalization to C$1 billion and under, and 52-week stock performance beginning from -90 per cent, for a list of companies with tanking stocks despite profitable operations.
What else should readers know about gold and its fluctuations when it comes to making investment decisions? How are you positioned based on gold’s recent price action?
Join the discussion: Find out what everybody’s saying about gold on Stockhouse’s stock forums and message boards.
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