Last quarter was incredibly kind to gold investors. For the first time in a long time, gold outpaced stocks. Which is really something considering the S&P 500 posted its strongest June since 1938. Meanwhile, fixed-income continues to hold less and less appeal as a safe haven as the market anticipates a fresh Fed rate-cut cycle.
To help you make sense of it all, we created this report. It examines the performance of gold and other major asset classes this year so far and highlights the conditions we see which could impact the gold market going forward.
Q2-2019: Gold Price Breakout
Gold began the second quarter at $1,295 per ounce. The price was flat in April and May, then spiked in June due to the Fed’s increasingly dovish stance, the conflict with Iran, and the ongoing US/China trade war. Gold ended the quarter up 8.8%.
Here is the performance of gold and other major asset classes in Q2 and YTD.
Gold outperformed all major asset classes and markets in Q2 except gold stocks and palladium, rising 8.8%. It’s now up 9.9% for the year. (We’ll note that Bitcoin, not shown, spiked 200% last quarter, up 230% YTD.) The US dollar index fell 1.1% last quarter, and is flat for the year.
Gold’s performance in other currencies also made headlines.
In total, gold is now at or near an all-time high in 72 currencies. To put the importance of this in perspective, the US represents only 4% of the world’s population.
Unsurprisingly, gold’s volatility also spiked. The CBOE Gold ETF Volatility Index (GVZ) ended the quarter 61% higher than where it started. However, the current reading of 15.94 remains roughly 25% below the Index’s 10-year average of 20.
Silver continues to trail gold, and is down 1.1% on the year. Gold’s stronger relative performance has pushed the gold/silver ratio (gold price divided by the silver price) higher. The ratio began the quarter at 85.8 and ended at 92.1, now a 28-year high. This suggests silver is a better value than gold at present for those looking to add bullion.
While our investment thesis is not predicated upon technical analysis, many chartists maintain that the gold price broke above a critical long-term resistance level in June. Gold had not exceeded $1,400 since August 2013, failing to break through the $1,380 level six separate times since then. The momentum demonstrated by a move that has shattered this stubborn six-year ceiling is well worth watching, as it appears gold has moved into a new price range.
Catalysts and Barriers
A number of potential factors could impact the gold price over the coming quarter.
The Fed: The US central bank has made a major dovish pivot, going from a steady rate-raising regime, to pausing those hikes, to now likely cutting them. All in just six months. When discussing the likelihood that the Fed will have to again resort to 0% interest rates and additional rounds of QE in the future, Chairman Jerome Powell said it was inevitable: “There will be a next time.”
It’s not just the Fed; other central banks are equally as accommodative, which is generally gold-bullish. As Bloomberg’s Eddie van der Walt said, “With central banks around the world turning more dovish, the latest move may just be the start.”
Interest Rates: As the quarter closed out, traders had priced in a near-100% certainty that a rate cut will be made at the Fed’s July meeting, though those odds have since pulled back to about 85%. Interest rate reductions are typically gold-positive, since they diminish gold’s holding cost and lower the competition from Treasuries. Some of gold’s rise may reflect a cut that has already been priced in, though research from the World Gold Council shows that gold tends to perform well when the Fed is neutral or dovish.
Negative Interest Rates: The amount of government bonds paying less than 0% continued to make headlines, hitting a new high in late June. Globally, a total of $13 trillion in government debt now offers sub-zero yields, rising by $2 trillion since late May alone. In fact, negative-rate debt now makes up almost 40% of the value of all government bonds outstanding.
This trend continues to be particularly prevalent in Europe. Last month, French and Swedish 10-year yields fell below zero for the first time ever. Nearly all debt issued by the Swiss government – from one-month to 20-year maturities – now carries a negative yield. This is closely followed by Sweden (91% of all government debt), Germany (88%), Finland (84%) and the Netherlands (84%).
In all, central bank activity around much of the world has become decidedly more accommodative. OECD Secretary-General José Ángel Gurría publicly stated that central bankers “have run out of ammunition.” As always, central bank guidance bears watching.
Trade Wars/Currency Wars: President Trump has complained loudly and frequently about trade imbalances and currency manipulations by foreign governments. It is expected that ongoing trade conflicts and overt efforts to weaken the US dollar would be gold-bullish.
Geopolitical conflicts: The clash between the US and Iran made geopolitical headlines in June. Iran shot down a US drone over international waters… President Trump imposed sanctions to freeze the assets of Iranian military commanders including the Supreme Leader… Iran claimed US sanctions “closed the door on diplomacy”… Trump threatened a heavy military response if Iran attacked any US interests.
Ongoing tensions between the two countries could continue to support gold prices, particularly if the conflict escalated. A resolution could dampen this catalyst.
Central Bank Gold Purchases: We’ve been highlighting the increase in central-bank buying in our reporting, which reached 45-year highs at the end of 2018. This price support has continued into 2019: Kazakhstan, Russia, and Turkey all added to official Reserves last quarter. Through May, China has added to its gold reserves for six consecutive months. There is no evidence that this trend has let up.
Recession Watch: The yield curve (as defined by the spread between 10-year and 2-year Treasuries) ended Q2 at a paltry 0.24%. The last six times the yield curve inverted a recession followed shortly thereafter. Meanwhile, the US Manufacturing PMI fell to 10-year lows in May. Gold is typically sought as a safe haven during periods of negative economic output, and tends to be flat or weak when GDP is growing.
The Hard Asset Hedge
The advantages of gold supersede quarterly price fluctuations. Gold…
- Has outperformed stocks over the last 20 years
- Can hedge against systemic risk, stock market pullbacks, and inflation
- Is a store of wealth
- Improves the risk-adjusted returns of portfolios, while reducing losses
- Can provide liquidity to meet liabilities during times of market stress
An appropriate balance of gold in a portfolio can serve as a useful hedge, particularly in light of the Fed’s new dovish stance, ongoing geopolitical conflicts, the unrelenting growth in negative interest rates, and trade and currency wars.
Now is a good time to check your gold allocation and consider whether you have the amount of bullion you may need or want.