The concept of “Gold ‘n Guns” has gained prominence among investors amid escalating global conflicts and economic uncertainty. According to Nicky Shiels, Head of Research and Metals Strategy at MKS PAMP, this investing approach offers valuable insights into gold’s performance in the coming months.
“‘Gold ‘n Guns’ often gets an unfairly negative reputation, which is unwarranted,” Shiels stated. “We have consistently discussed the impact of escalating geopolitical tensions, particularly since Russia’s invasion of Ukraine in February 2022. This shift has significantly influenced gold.”
Shiels observed that, following the invasion, gold’s historical correlation with U.S. Treasury yields diminished as the metal evolved into a more effective geopolitical hedge, highlighted by increased central bank purchases.
“The invasion marked the onset of a new wartime era,” Shiels explained. “In such times, defense stocks, like those of Lockheed Martin (LMT), surge as defense spending rises, and gun sales increase due to heightened consumer fears and insecurities.”
According to Shiels, gun sales and gold prices have shown a strong correlation, with U.S. consumer gun sales having a +0.81 yearly correlation with gold since 2002, and +0.79 quarterly. Additionally, the correlation between gold and the relative performance of the DJ Aerospace and Defense sector versus the Dow Jones has strengthened significantly post-invasion and after the October 7th Hamas attack.
Shiels referenced a Bloomberg article highlighting Rheinmetall, a major German defense manufacturer, which reported unprecedented growth in arms manufacturing. Rheinmetall’s CEO, Armin Papperger, noted the arms boom as the largest he has ever witnessed, with annual revenue growth projected to reach €10 billion.
Global military expenditure exceeded $2.44 trillion in 2023, marking a 7% increase from 2022, driven primarily by the U.S., China, and Russia. U.S. military spending alone amounted to $916 billion, representing 68% of total NATO spending. European NATO members have increased their military budgets, though some have yet to meet the 2% of GDP target set a decade ago.
“This shift has fundamentally altered Europe’s security outlook, redirecting a significant portion of GDP from other areas like infrastructure and green initiatives towards military spending,” Shiels said. “The NATO 2% target is now seen as a baseline rather than an upper threshold for military spending, which influences gold prices.”
Shiels also highlighted the rising U.S. national debt, which has led to interest payments surpassing annual defense spending. “Given proposed policies from both Harris and Trump, this trend is likely to continue,” she added. The rising cost of debt could constrain other fiscal spending areas, such as military expenditures, which might impact gold prices positively.
Shiels believes that “Gold ‘n Guns” effectively encapsulates the idea of gold as a geopolitical hedge. “Metrics such as defense spending, gun sales, defense stock prices, and central bank purchases are strong indicators of the geopolitical premium and gold’s value,” she said. “Given the recent strong correlations, it might be time to consider these factors over traditional metrics like U.S. real yields and the dollar.”
Addressing recent frustrations about gold’s short-term performance, Shiels noted, “Gold is up 17% year-to-date, outperforming U.S. equities and Big Tech. It is performing as expected in the long term. Given the current geopolitical and defense spending context, gold is poised for further gains, potentially reaching new all-time highs around $2,480 by the end of the year.”
