A Gold Rally Like No Other

• Gold has broken all-time highs and its long-term relationship with inflation-adjusted (real) yields has completely broken down.

• At the same time, gold mining stocks have also been left trailing in gold’s wake.

• Is the underperformance of gold miners an opportunity for investors?

Gold Surges on Investor Indifference

Gold price has gained 20% since the middle of February 2024, to fresh all-time highs.  

Multiple times, gold’s monthly close exceeded those previous highs that formed the triple top that has been in place since August 2020. But very few had noticed and those who did hardly cared:

• Retail investors have already turned away from gold, increasingly focusing their attention on opportunities in the crypto space.

• Institutional investors, who have often questioned the need for gold in portfolios, have been reducing physical holdings, whilst asset managers with equity mandates have been reluctant to engage in companies across the mining sector.

Many analysts have been scratching their heads because of the ongoing outflows from physical gold ETFs that have accompanied the latest rally in gold. In fact, holdings across the three largest physically backed gold ETFs have fallen for the last 8 months.

Even more extreme, and uncommon, is perhaps the divergence between US inflation-adjusted (real) yields and the gold price.

Central to the discussion is that gold doesn’t provide an income, yield, or dividend. Therefore, when compared to income-bearing opportunities:

• Gold becomes more attractive when yields are falling. This would be especially true if yields are negative because, at that point, the holder of cash (or other fixed income instruments) is penalized by this negative ‘carry’.

• Gold becomes less attractive when yields are rising because the hurdle rate that gold needs to achieve to remain competitive is also rising.

Therefore, the relationship between gold and real yields is an inverse relationship (Note: in this instance, we have used a market-based measure of inflation expectations to calculate real yields, rather than an actual inflation measure such as CPI).

If we invert real yields, we can see:

• A close long-term relationship from 2007 to 2022, followed by a complete breakdown in this relationship since 2022.

• Since 2022, gold has soared to $2,400/ounce even as real yields have risen (remember, the real yield is inverted on this chart).

• Arguably, gold should be closer to $1,000 with real yields currently at 2%, if the old relationship had held.

So, what could be driving the divergence, and could this persist?

Debasement, Debt, and Dollar Weaponization

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