Despite a weak start to the second quarter, gold and gold stocks are still outperforming other major financial assets on a year-to-date basis.
The yellow metal has had a much better 2022 compared to risk assets like stocks and junk bonds, with gold prices essentially flat year to date, compared to losses of 19% and 9%, respectively, in the S&P 500 and the Bloomberg High Yield Bond Index.
With such a strong relative performance, then, why hasn’t the precious metal attracted more interest among safety-oriented investors? My answer is that gold’s failure to overcome the August 2020 record high at $2,063 an ounce during the last major rally was a psychological blow to the “gold bugs.”
Gold’s March 8 closing high at $2,047 came just a few dollars shy of the all-time peak and likely undermined the confidence of the bulls. It would certainly explain the metal’s disappointing performance in the last nine weeks.
More than any single short-term factor, however, rising interest rates have taken a lot of wind out of gold’s sails. You could argue that the huge rally in the U.S. 10-year Treasury yield, from 1.8% to as high as 3.1% last week, since early March was simply too much for non-yielding bullion to compete with. Thus, income-focused investors have had every incentive to look beyond gold to the bond market.
The chart below provides a succinct picture of gold’s underperformance versus the 10-year yield. Admittedly, it’s not a pretty one.
Keep in mind that the gold versus 10-year yield ratio is one of gold’s most important leading indicators. Historically, gold’s strongest and most durable upside moves have occurred when this ratio is in a rising trend.
Gold Stocks Still a Safe Bet
Ultimately, however, gold is a safety asset and is always in high demand when there’s plenty of uncertainty over the economy and the geopolitical outlook—even when rates are rising. And right now, there’s no shortage of worries on either of those two fronts. Because of this I don’t think you should count gold out just yet.
I would also point out that during the 2003-2007 gold bull run, the metal had to complete with rising Treasury yields. I mention this period since there are so many similarities between then and now (especially rising inflation and the threat of war).
Once the dust settles from the latest stock market sell-off, gold should be able to catch a fresh safety bid, if recent history is any guide. Indeed, gold’s strongest performances of the last two decades have followed the immediate aftermath of bear markets in the major indexes (which the Nasdaq is now in).
Bottom line: The gold bulls should still prevail in spite of rising rates in the intermediate term, though for now the gold market remains too choppy to make any new commitments.
But that could change in a hurry, especially if we get a few more days like May 13, when gold stocks (as measured by the GDX) were up more than 2%. When it does, I will recommend which gold stocks and ETFs to pounce on to my Cabot Sector Xpress Gold & Metals Advisor readers.
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*Editor’s Note: This post was excerpted from the latest issue of Cabot Sector Xpress Gold & Metals Advisor.