Zacks Investment Management

Bucking the global commodity rout, gold spot prices have surged more than +11% over the past six months. Interest in gold is typically driven by disinterest in alternatives or because there is a heightened sense of uncertainty (or, at worst, global panic). It follows that, given some uncertainty over global growth and deflation, gold has again emerged as a temporary “safe haven” for investors.

Interestingly, though, this trend runs contrary to widespread expectations of tepid gold prices in the short to medium term. This is especially the case as the U.S. Fed is embarking on monetary tightening and as recent dollar strengthening has convinced most that gold would lose its luster compared to other higher-yielding assets.

That being said, nagging growth uncertainties around the world have cast a gloomy outlook on the U.S. trade balance such that many investors are predicting a pause in Fed rate hikes followed by a cooling off of the greenback rally. Expectations of the dollar’s depreciation could, in turn, lead to a bullish outlook for gold prices. But, we’d urge investors not to be fooled – we see this gold rally being fueled by an emotional response to market volatility and not due to a shift in the metal’s fundamentals.

As such, we don’t expect the gold rally to endure for too long (no gold rally really ever does).

While some panic-stricken investors rush to gold during a financial meltdown, the recovery period often negates the benefits. For example, in the 2008-09 Great Recession, gold rose mightily as stock markets crashed. But, in the post-crisis period the S&P 500 has grown by more than +46% since 2011 whereas gold declined by more than -9%. Gold doesn’t do so well in good times, and we still think these are good times.

Since 2011, the S&P 500 has Increased +46% while Gold has Fallen -9%

The current U.S. stock decline should not, in our view, be dubbed anything even close to resembling a financial meltdown. Strong economic fundamentals, underscored by firm U.S. consumer confidence (and bolstered by promising wage and employment conditions), should drive the stock market higher as global conditions start to improve and fears subside.

Bottom Line for Investors

The recent ‘gold rush’ is primarily a consequence of investors’ feverish desperation to hedge against uncertainty.  Pessimism over global growth and policies has intensified so much that many are willing to hold a non-interest bearing commodity for its short-term potential price appreciation. But, as economies like Japan and Europe work through their monetary easing policies and global expansion resumes, it is assets with strong fundamentals (like stocks) that will likely yield investors solidly positive returns.

Disclosure