Gold shines as US stocks stumble

America’s headline S&P 500 stock index continues to swing around as bulls and bears grapple for supremacy – and while they are slugging it out, gold is quietly doing the business for investors.

The S&P 500 is up by barely 2% over the past year, while gold is up by nearly a quarter, and a leading index of 15 gold miners is showing gains of almost 40%. Those figures are in dollars, so the capital gains for UK-based advisers and clients who will be looking at their returns in sterling are even better, thanks to the weakness of the pound.

Gold has beaten US equities hands down in the past year

Source: Refinitiv data

“Gold’s latest gains are also particularly notable because they are coming when the dollar is gaining too.”


Gold’s latest gains are also particularly notable because they are coming when the dollar is gaining too. The trade-weighted DXY (or ‘Dixie’) dollar index is trading near 98, despite a US Federal Reserve interest-rate cut and the attempts of an irate President to talk (or Tweet) down the buck.

Normally a rising dollar signals weakness in gold, as it makes the metal more expensive to buy. But they are gaining in tandem, which suggests market participants are nervous and may be looking for potential boltholes in preparation for more difficult times.

Gold and the dollar are (unusually) advancing together

Source: Refinitiv data

Tug-of-love

The S&P 500 may be trading near its all-time highs – set just above the 3,000 mark in late July – but it is making heavy weather of forging decisive gains, as the benchmark is no higher than it was in mid-January 2018.

This is due to a tug-of-war between supporters and sceptics of US stocks. Buyers believe the US Federal Reserve’s move to cut interest rates will stoke further economic and corporate earnings growth. Sellers are countering that a downturn is coming, irrespective of Fed policy, with the result that US equities will be left looking expensive and overextended.

US equities are thus torn between these two schools of thought, especially as a 10-year upswing means the consensus view is that US stocks are still a good place to be, thanks to the superior economic backdrop in the US, faith in corporate earnings prospects and the Fed’s switch from raising to cutting interest rates.

“The precious metal has finally cracked through the $1,350 to $1,360 an ounce range that had capped several advances over the past five years.”


But the better price momentum is coming from gold, which was out in the cold at the start of the year after another dismal showing in 2018. The precious metal has finally cracked through the $1,350 to $1,360 an ounce range that had capped several advances over the past five years and smartly progressed to a six-year high above $1,500.

Gold miners are outpacing gold and the S&P 500

Source: Refinitiv data

Loss of nerve

Markets’ enthusiasm for gold seems to be gathering for three reasons.

  • Fresh interest-rate cuts around the world mean there is less opportunity cost in owning the metal, which itself generates no yield, as returns on cash (and bonds) go lower once more.
  • This year’s policy U-turn by central banks suggests they are not quite as in control of the global economic situation as advisers and clients would like to think and fears of a downturn or recession mean investors are seeking out safe haven assets.
  • With interest rates already so low, central banks may not have that much monetary ammunition left, meaning they may return to Quantitative Easing (QE) and more money creation in the event of a recession. Such policies could tempt advisers and clients to look for hard assets, such as precious metals, to protect their wealth, as happened during the early rounds of QE in 2009–2011.
  • Gold miners are outpacing gold and the S&P 500

    Source: Refinitiv data, Bank of England, Bank of Japan, European Central Bank, Swiss National Bank, US Federal Reserve and FRED – St. Louis US Federal Reserve database

    “As a result of the metal’s resurgence, gold miners are also enjoying a return to favour.”


    As a result of the metal’s resurgence, gold miners are also enjoying a return to favour. The HUI Gold BUGS (Basket of Unhedged Gold Stocks) index contains 15 gold miners and rising gold prices are great news for them, especially if they are increasing production and managing their costs carefully.

    The world’s biggest gold miner, by market capitalisation, is Colorado-headquartered Newmont Goldcorp, with its $32 billion price tag (a fraction above Toronto-based Barrick Gold). Newmont Goldcorp’s all-in sustaining cost (AISC) figure, for example, was $1,016 an ounce in Q2 2019, so every $1 on the gold price above that mark will drop quickly through to the bottom line.

    Such stock-specific niceties are unlikely to be of too much concern to advisers and clients, who will not have the time to delve into such details and will be most likely inclined to access gold miners through an active or passive fund, should they feel such exposure is suitable for a client’s overall strategy, target returns, time horizon and appetite for risk.

    But what this example does show is that if gold keeps rising, then the miners’ gearing into those price gains means their profits should rise faster still, assuming costs are well managed. Equally, the opposite would also hold true – if gold prices were to drop back, as advisers and clients regained confidence in central banks’ policies and the global economic outlook, then that could again pressure the miners’ profits and cash flows, to the detriment of their share prices.

    AJ Bell Investment Director

    Russ Mould’s long experience of the capital markets began in 1991 when he became a Fund Manager at a leading provider of life insurance, pensions and asset management services. In 1993 he joined a prestigious investment bank, working as an Equity Analyst covering the technology sector for 12 years. Russ eventually joined Shares magazine in November 2005 as Technology Correspondent and became Editor of the magazine in July 2008. Following the acquisition of Shares' parent company, MSM Media, by AJ Bell Group, he was appointed as AJ Bell’s Investment Director in summer 2013.

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