Gold is increasingly establishing itself as a reliable asset in today’s turbulent economic environment, with its standing relative to cyclical markets continuing to improve. Unlike many assets, gold exhibits strong counter-cyclical characteristics, rivaling only Treasury bonds and the U.S. dollar in its role as a financial refuge during economic stress.
When economic pressures mount, as evidenced by the recent August Payrolls report, and cyclical markets react negatively, investors often seek safety in the world’s reserve currency and U.S. Treasury bonds. Gold, however, remains a significant alternative store of value, retaining its status through various economic cycles. Currently, as investor confidence wanes, gold’s appeal is growing, reflected in its ratios relative to cyclical markets.
Gold vs. S&P 500
Presently, the handle on the right shoulder is breaking upward. This shift comes as investors prematurely sell gold stocks, mistakenly treating them as part of broader cyclical trends. Although the gold stock sector faces potential short-term corrections due to its previous correlation with broader markets, this corrective phase is unlikely to undermine the sector’s long-term prospects.
Gold vs. Global Markets
Gold has been trending positively against several U.S. sub-markets, such as Small Caps, throughout the year. This trend is also evident in global markets, where gold maintains an established uptrend.
Gold vs. Commodities
Gold continues to outperform the S&P Goldman Sachs Commodity Index, despite disinflationary trends. The anticipated commodity super-cycle is on hold as disinflation and potential deflation weigh on commodity prices.
Gold vs. Oil
The gold-to-oil ratio highlights gold’s superior performance relative to its mining costs. Despite current market sell-offs in gold mining stocks, gold mining remains robust compared to oil, emphasizing the sector’s counter-cyclical nature.
Gold vs. Copper
The ratio of gold to copper remains a negative economic signal, intensifying over time. This suggests persistent economic stress, aligning with gold’s defensive appeal.
Gold vs. Silver
The Gold/Silver Ratio (GSR) remains firm, signaling potential pressure on the gold mining sector alongside inflation trades. Historically, rising GSR has been associated with bearish gold mining trends. However, exceptions exist, such as the 2000-2003 period when both the GSR and the HUI Gold Bugs index increased, marking the end of the pre-2008 inflationary bubble.
Looking Ahead
The recent decline in Treasury yields signals a shift in macroeconomic dynamics, with significant implications for gold and gold mining stocks. The era of aggressive bubble-blowing by central banks may be over, potentially benefiting precious metals as the cyclical asset market dynamics evolve.
In summary, despite short-term volatility, gold’s relative strength against cyclical assets and its role as a financial refuge suggest that its position will continue to improve. Investors should remain attentive to market signals and be prepared for shifts in macroeconomic conditions.
