Rudi’s View: Facts & Fiction About Gold

Rudi's View | Mar 27 2024

In this week's Weekly Insights:

-Facts & Fiction About Gold
-Conviction Calls & Best Buys
-Risk-On Bubble & Mid-Caps Outperformance

By Rudi Filapek-Vandyck, Editor

Facts & Fiction About Gold

If there had been an official Top Ten list of most disappointing trading & investment ideas these past number of years, no doubt gold would have been nominated by many.

Look no further than the share price performance of global industry stalwarts Newmont Corp and Barrick Gold over the past five years or so. Those are truly ugly looking price charts, mostly heading in the wrong direction.

The situation for ASX-listed gold miners and explorers is more diverse, and a number of them have participated in the general equities rally from October lows, also carried by the recent rally in the price of gold bullion, but volatility overall has been exceptionally large.

Many an investor who's had the courage and the tenacity to stay on board these past number of years would be feeling bruised and brutalised, and not necessarily vindicated as of today.

As per usual, the devil hides in the details.

Gold bullion, typically priced in USD, has actually performed quite well. Total return for Global X's ETF GOLD has been 11.93% per annum over the past five years, and 7.99% p.a. over the past decade. In comparison, total return for the ASX200, including dividends but not franking, has been 8.75% over five years and 8.21% over ten.

And now for the Big Surprise: VanEck's Gold Miners ETF, which comprises of 53 internationally listed gold miners, mostly in Canada, the USA, Australia and South Africa, has only generated 5.51% per annum these past five years. As indicated, the return from many individual companies has been far, far worse.

Conclusion number one: the outlook for gold does not by definition equal the outlook for producers of the metal. This is one lesson that needs to be learned and re-learned by investors time and time again.

For good measure: there are times when the return from gold miners exceeds the performance of gold bullion; this usually occurs when gold is in favour, experiencing a bull market. Hence, the indication from gold miners underperforming the metal is gold has not been in a bull market these past number of years.

That makes sense as the USD price first reached above US$2000/oz during the early covid panic in 2020 and only recently, upon the third attempt, has the price of gold managed to surge away from it.

Here the irony is, of course, once the panic subsided and the worst of the global pandemic had been relegated to the past, the world economy was confronted with an outbreak of consumer goods inflation, which did not result in gold outperforming.

This would have been another Big Surprise to many: the ruling narrative is gold acts as a safeguard against inflation. But when inflation did announce itself, gold ducked for cover!

Let's get this straight: does gold act as a trade-off against inflation?

The short answer is: yes. But the correct answer is: not in the way many think it does.

And herein lies the apparent enigma surrounding gold. To most investors who buy into the narrative of gold protects wealth versus inflation, this means when inflation goes up, so too should follow the price of gold.

A detailed analysis of gold's behaviour in the past reveals that's simply not how it works.

Admittedly, when looking at gold's performance in the 1970s, for example, it seems, at prima facie, that's how gold protects against inflation. But the true driver, even back then, is the so-called real yield on US Treasuries. To determine that real yield, we simply compare inflation with the US bond yield.

In today's context, consumer price inflation in the US is trending down from circa 8% in early 2022 to an estimated below-3% later this year. If the Fed's projections prove correct, the CPI should be back around 2% in 2025. In the same respect, the yield on the US ten-year Treasury rallied to 5% last year, and is currently around 4.20%.

We don't have to consult a mathematical genius to see the real yield is now in positive territory; the CPI is trending below the ten-year yield. History suggests this is not a beneficial environment for gold. Bullion benefits most when the real yield is negative, i.e. when CPI exceeds the yield available on the US bond market.

But simply drawing such conclusion is to deny financial markets' foresight. Equities have been rallying on the prospect of central banks lowering their cash rates. It requires no stretch at all to assume gold too is already looking forward to official cash rates falling later in the year.