The chief investment strategist for BMO Capital Markets has some advice for those investors tempted to pile into bullion and gold equities: don’t do it.
The metal is seeing a resurgence of investor interest in recent days thanks to its long-awaited break this month of the US$1,500-per-ounce resistance level amid what seems to be a favourable macroeconomic backdrop.
Gold tends to benefit during times of slowing global growth, a weakening U.S. dollar, and plunging bond yields. It doesn’t offer any yield, but that might not be that much of a deterrent when government bonds are offering skinny (and in many cases, negative) returns. Gold also almost always benefits as a safe-haven play during times when investors are nervously offloading equities.
Indeed, gold prices are now up about 6 per cent this month and 23 per cent over the last 12-months. The S&P/TSX gold sub-industry is the only industry up double digits so far this month, and is up 61 per cent over the past year.
But BMO’s Brian Belski suggests gold’s fundamentals are already largely priced into the market and equities in the sector are not an easy play to make during times of global uncertainty.
Case in point: the Brexit fiasco of 2015-16.
The initial decision to have the referendum had little impact on gold prices, he notes. The gold price and stocks only started to rally after the referendum date was set and rhetoric increased around a leave win. “Although gold continued to rally for several weeks after LEAVE won the final vote, gold prices and stocks ultimately peaked shortly after the referendum as the uncertainty dissipated, despite being a negative vote to leave the EU,” he points out.
A similar pattern played out this time. Similar to Brexit, gold prices and stocks did not initially react to trade threats and even steel tariffs. It was not until U.S. President Donald Trump threatened tariffs on US$267-billion of Chinese imports did gold prices bottom. Furthermore, gold prices continued to rally even after trade tensions eased in late December with a cease fire on new tariffs.
“It was not until President Trump suggested a trade deal was in the advanced stages did uncertainty subside and gold prices start to decline. We believe this is instructive in showing the potential reaction of gold stocks when tensions once again subside,” Mr. Belksi said.
“Similar to the 2015/2016 Brexit rally, gold prices appear to be event driven with momentum likely to be dictated by swings in noise and rhetoric. As such, given the unpredictable nature of the US/China trade war we believe market timing will be very difficult in the current environment, and instead, investors should refrain from chasing gold stocks at these levels and remain focused on fundamentals,” he said
Mr. Belski points out that gold sector valuations have moved ahead of long-term historical average and above the broad market.
“While we agree a prolonged trade war likely generates negative fundamental implications, we would be very reluctant to chase gold prices and stocks at these levels given the elevated level of fear and rhetoric that has been the primary driver of recent performance, in our opinion," he said in a note.
He continues to rate the sector “market perform,” and suggests investors thinking about the sector first consider the larger-cap names that have diverse operations and strong cash generation.
Tim Shufelt: The argument for gold is getting brighter by the day