I started recommending gold pretty soon after the SPDR Gold Shares (GLD) exchange traded fund became available at the end of 2004. It was an easy way to get precious metal exposure in a “paper portfolio.” One which didn’t require a bunch of futures trading or visits to the local coin shop.
Sure, gold is little more than shiny hunk of metal. It has limited commercial applications. It doesn’t pay a dividend or interest. It doesn’t generate any revenue or profits. In truth, when you think about it, gold is sort of a silly investment in that regard.
Still, people have been crazy about the stuff for as long as there have been people. So much so, the supply has never seemed to meet the true demand. Therefore, why not put a little bit into your portfolio?
But why the surge since the end of 2022? At the end of that year, the so-called “generic first gold future” traded at $1,826.20 per troy ounce. Yesterday, at 10:22 am CDT, it was going for $2,982.20. Obviously, that is a huge move in a relatively short period of time.
Especially since, again, gold is little more than a shiny hunk of metal.
You can go to any number of websites and find any number of reasons why gold has rallied the way it has. Some of the articles and explanations I have read are pretty darn complicated. They would have you believe everyone understands the complexities of the global currency markets and international capital flows.
Psst. They don’t.
Interestingly, as long as gold has been around, the investing community doesn’t have as much good information on it as it does the stock market. Governments tended to hoard the stuff, and put arguably artificial prices on it. It just wasn’t all that easy for John Q. Public to get his hands on the stuff, especially in a meaningful way.
So, trying to identify historical trends in gold trading is not as simple as you might think. There just hasn’t been what I would consider a significant secondary retail market for the stuff until fairly recently.
So what do the last 20 years or so tell us?
While that is nowhere near the time frame I would like to make generalizations, it would seem that gold does well when people feel uncertain about what is happening around them. To be sure, so-called experts would or could make it sound much more complicated than that.
However, when push comes to shove, gold seems to do its best when people feel the worst.
Admittedly, that is a blanket statement, but it makes sense, and I do have a little bit of math to support this contention.
Over the last 10-years, from the end of February 2015 through the end of February 2025, there was a (0.29) correlation between the price of GLD and the Conference Board’s Consumer Confidence Index (using month-end observations). This is a pretty decent negative correlation between the two, meaning gold prices tend to go up when consumer confidence goes down.
Clearly, that is not as strong as (1.0). However, that negative correlation IS enough for you/me/anyone to make the follow statement at a cocktail party, tailgate or wherever it is you have such conversations: “gold tends to perform reasonably well as an asset class when the U.S. consumer feels uncertain about their future.”
So, with everything that has been happening in the world, is it any real surprise gold seems to be hitting an all-time high every day?
Even my most conservative acquaintances seem to be getting a little exhausted with what seems to be a “shotgun” approach to both economic and foreign policies. After all, sometimes rifles are more effective. I mean, what would you rather take moose hunting? A .410 shotgun using #9 shells OR a .30-06 with 180-grain bullets?
Hey, you do you. However, if I ever go moose hunting, which I sincerely doubt, I am taking a .30-06 with me.
Of course, there are those who would argue gold’s recent rally started long before Donald Trump’s second inauguration. No argument. They would further argue that gold has been a safe haven due to increased investor skepticism over the global financial system and economy.
Why not buy gold when the world’s primary economies, Treasuries and monetary authorities are as capricious with their currencies as they have been since the Financial Crisis of 2008-2009? And borderline careless with them since the worst of the pandemic in 2020?
A friend of mine has repeatedly told me the U.S. dollar is only as strong as it is relative to other major trading currencies because the rest of them are so weak. As I have told numerous clients, prospects, and groups: “while I am certain I will offend someone with this statement, as I am sure it is not politically correct, in the land of the blind, the one-eyed man is king. In the global currency markets, the U.S. dollar is the one-eyed man, and he happens to be wearing Coke-bottle glasses.”
In essence, what he is telling me is gold is a much better store of value than “intrinsically worthless paper fiat currencies, which global monetary authorities can produce out of the ether and with little to no supervision.”
Taking the argument one step further, he would argue the strength of fiat currencies is a reflection of the trust the markets have in the entities which produce them. You can throw all the noise about “real interest rates” out the window, because real interest rates are essentially the cost of the intrinsically worthless currency units.
So, how do you price something which doesn’t have any value? That is what he would like to know, and part of the reason why his “target price” for gold is significantly higher than where the shiny stuff trades today, as in 7x higher. Such is his distrust for the powers that be that set the rules of engagement in the world.
While I might not be as bullish as he is, or bearish as the case may be, I can make a much better argument for gold at $20,000/troy ounce in 5-years than I can gold at, say, $500/troy ounce. The former is unlikely, but the later is beyond comprehension.
But where does it go from here in the interim?
Much of that depends on the President.
- The longer he persists with the shotgun approach to economic and foreign policy, the more uncertain and less confident investors and business owners will feel.
- The more uncertain and less confident investors and business owners feel, the higher the price of gold will be.
Should the Administration shift tactics, and start to “rifle” its approach, the opposite will be true. Investors will feel more confident, and the rally in gold will eventually fizzle. As anyone who was ever been single can tell you, a little crazy can be kind of fun. However, a lot of crazy can be very, um, concerning.
So, until President Trump changes his stripes OR the remainder of the world acquiesces, you can expect some volatility and inflated precious metal prices. Regardless, in 20-years, you will be happy you bought gold in 2025.
Just as I am happy I started recommending the stuff 20-years ago.
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this and every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.
Chief Economist
Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as well as those of our Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.