The price of gold has broken a series of records recently — there were 40 new highs in 2024. The dollar gold price rose by 19% in the first quarter of this year1, the biggest quarterly increase since 1986.
These gains reflect the role of gold as a safe-haven asset in times of uncertainty as well as a portfolio diversifier. Dollar weakness and the inflation outlook also has helped to lift demand.
However, the gold market is lacking broad-based participation from investors, in my view. The price gains over the last year mostly reflect buying from a narrow group of derivatives traders including hedge funds, and from central banks, which have been bulking up their holdings for the last three years.2
On the sidelines
At the time of writing this commentary, long-only investors haven’t participated in this rally in the way they did in an earlier bullish period for monetary metals, 2009-2012, when central banks were ramping up quantitative easing. For now, mainstream investors remain mostly on the sidelines and, we believe, under-allocated to gold, silver and gold and silver mining stocks.
I believe this will change and I have seen some early indications of this. In the volatile days after the US unveiled its tariff plans on April 3 (President Trump called it Liberation Day), a handful of mining shares rose. Some generalist investors started to nibble on the sector even as the metals prices themselves fell. The narrative in the market then was that because gold, silver, and other metals were exempted from the reciprocal tariffs there had been a sudden reversal on the arbitrage trade of monetary metals into the US, which had been happening through Q1.
The price of silver rose 18% in Q1, the most since Q4 20223, though it has fallen back somewhat to its 2023 trading range. Looking at the gold-to-silver price ratio, I think that silver is overdue for a rebound. Silver, which is an important component used in industry, also is in a material supply shortage.
What may work now
I believe that in the coming days and weeks asset allocators will be forced to stop sitting on their hands and to think about what investments may work for the rest of the year. In my view, the mining companies are performing too well at the operating level to be ignored any longer, especially within this more dramatic market backdrop where many other equities are a pain trade.
Miners most often gain momentum in bullish periods for monetary metals. Because they have fixed costs, a ramp up in gold and silver prices tends to feed straight into the mining companies’ profitability and cash generation. At the moment, they are throwing off a lot of cash, they are paying dividends, and they are undervalued versus history based on metrics such as price to cash flow.
Stagflation?
We believe the current macroeconomic environment is attractive for monetary metals’ investors. Is the US facing a period of stagflation? It seems more likely than it did a year ago, in my view. Ever since Liberation Day, economists have been scaling back growth estimates and raising inflation forecasts. Stagflation has in the past proven to be an ideal backdrop for monetary metals.
My view is that gold and silver and gold and silver miners ought to be considered a mainstream investment for pension and institutional mandates and long-only investors. A small allocation to gold has been shown to reduce volatility in a portfolio of stocks and bonds.4
Gold is a principal reserve asset of central banks, which use it to protect against inflation and market risk, and these institutions have been increasing their holdings, according to the World Gold Council. We think that gold, silver and gold and silver mining equities have an important role to play in a well-diversified investment portfolio, especially in the current market and macroeconomic environment.
Sources
1Bloomberg as at 2.4.25. Please note that past performance is no guide to future performance.
2World Gold Council, 5.2.25 https://www.gold.org/goldhub/research/gold-demand-trends/gold-demand-trends-full-year-2024
3Bloomberg as at 2.4.25
4Jupiter data via Factset as at 31.12.24. Refers to lower volatility over 1, 5, 10 and 20 years in a portfolio with 5% allocation of gold, 19% fixed income, 76% equities vs portfolio of 80% equities 20% fixed income.
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