Gold Is Still Shining After the Sell-Off

After surging to a new all-time nominal high in January, the gold price consolidated in February and sold off following the outbreak of conflict in the Middle East. Since that time, the positive inflection in job openings and the Federal Reserve’s more hawkish stance has pushed up expectations for short-term real interest rates and prompted a derating in gold, which is down nearly 8% year-to-date.¹

As a result, gold has moved closer to its long-term geometric average relative to the stock of US Treasuries, down from its premium valuation in January and February. While higher interest rates may be supporting the US dollar, we also note that higher rates undermine the fiscal viability of servicing government debt as the stock of debt rolls into higher rates. In our view, the valuation of gold appears more compelling at current levels, particularly given the confluence of a generationally high stock of debt to GDP, persistent primary deficits, aging demographics in the US and growing defense spending needs.²

In comparison, gold was closer to its long-term geometric average relative to the S&P 500 Index earlier this year and is now below its historical valuation relative to equities.³ Low risk aversions in both equity and credit markets are supporting late-cycle spending and exuberance, as evidenced by the successful initial public offering of SpaceX and recent rally in semiconductor stocks.⁴ Should markets encounter an unexpected crisis, this may support a positive drift to the value of gold.

We continue to believe gold is best suited as a strategic allocation against adverse events, not as a tactical trade. In our view, its long-term fundamental drivers—persistent geopolitical turmoil and troubling government debt dynamics among them—currently remain intact, as does the case for strategic exposure to a potential hedge like gold.