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After a stellar three-month stretch for gold bullion and the stocks of companies that dig it out of the ground, the glitter appears to be coming off the rally in all things gold.

An easing of global recession fears and a nascent rebound in long-term bond yields have taken back some of the gains in gold and gold equities through an otherwise ascendant summer.

As of Wednesday, gold prices were higher than US$1,550 an ounce for the first time since 2013, while the group of gold stocks within the S&P/TSX Composite Index was up by more than 50 per cent on the year. In the last two trading days of the week, however, Canadian gold stocks declined by 8.1 per cent, while spot prices declined to US$1,507.

“We think that the rally in gold has run its course,” Simona Gambarini, a markets economist at Capital Economics, wrote in a note.

Markets have gone too far in expecting central bankers to stimulate the global economy, Ms. Gambarini said. For gold investors, the result is likely to be disappointing “when it becomes clear that the degree of monetary stimulus that investors are expecting in the U.S. and elsewhere will not materialize.”

Gold has clearly been a beneficiary of general economic anxieties in recent months, as the trade dispute between China and the United States has contributed to a weakening of manufacturing activity around the world.

As a result, gold stocks have taken on a profile not seen since the most recent major global industrial slowdown in 2015-16. The cumulative flow of money into global gold funds hit a record of more than US$48-billion in August, according to Merrill Lynch.

Meanwhile, global gold-backed exchange-traded funds, such as the SPDR Gold Shares ETF, for example, have increased their total gold holdings to 2,733 tonnes, which is just 2 per cent away from a record high, the World Gold Council reported this week.

And in Canada, gold miners currently account for seven of the top 10 performers in the S&P/TSX Composite Index year-to-date.

“Almost long forgotten, gold is reaffirming its reputation as a portfolio stabilizer during uncertain times,” Craig Basinger, chief investment officer at Richardson GMP, said in a report.

What’s been peculiar about this latest gold bull market, however, is that it has continued along even as the stock market has regained its composure, and as the U.S. dollar has rebounded.

Gold typically does well in times of market stress, when capital is flowing away from riskier assets. But between early June and this past Wednesday, the S&P 500 index rose by 7 per cent, while the spot price for gold advanced by 17.1 per cent.

Both gold and the greenback, which have a strong negative relationship historically, also rose in tandem through the summer, with the U.S. dollar this week hitting a two-and-a-half-year high against a basket of global currencies.

The best explanation for gold’s recent strength is the spread of negative interest rates, Ms. Gambarini said in her note. “Since gold is a non-interest-bearing asset, negative yields significantly improve its appeal relative to that of bonds.”

Slowing global growth, combined with a loosening of monetary policy by global central banks, had put renewed downward pressure on bond yields this year, inflating the sum total of global bonds bearing negative yields to more than US$17-trillion.

But the fear trade is showing signs of a reversal.

Yields on 30-year government bonds in Canada and the United States ticked up from recent record lows to sit at 1.5 per cent and 2.01 per cent, respectively. And the aggregate level of negative-yielding debt globally has declined to around US$15.6-trillion, as of the end of this week.

There is little room for yields to decline significantly even if global growth continues to slow and equities sell off once again, Ms. Gambarini said.

On the equity side, however, the mining and minerals equity team at RBC Dominion Securities makes the argument that gold mining stocks have failed to keep pace with the move in gold prices.

Current North American valuations are pricing in gold at about US$1,400 an ounce, the RBC report said.

“This suggests to us that there are opportunities for fundamental investors to achieve attractive returns investing in gold equities.”

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