Gold could outgain stocks as economic risks rise – Mike McGlone

“The question of ‘why buy gold with the US stock market on a tear and Treasury bills yielding over 4%?’ may be changing, given the metal’s kept pace with the AI-driven S&P 500 total return for about three years,” said Mike McGlone, Senior Commodity Strategist at Bloomberg Intelligence. “Consensus that US equities will go up under a second term for president-elect Donald Trump might be a top factor buttressing gold.”

According to McGlone, “Gold’s on-par performance with the S&P 500 the past three years may suggest it’s gaining an upper hand vs. the AI-driven stock market.”

“Rising geopolitical tensions are a top gold tailwind, indicated by its almost 50% gain vs. 40% for the S&P 500 Total Return Index (SPXT) and crude oil’s 20% decline since China and Russia announced ‘unlimited friendship’ in February 2022,” he noted. “Our graphic shows what might matter most for the metal going forward: its relationship with the stretched US stock market.”

“Locked in a narrowing cage since 2021, the ratio of the SPXT vs. gold is ripe to break out, with risks leaning to the downside if the US stock market’s relationship with GDP is a guide,” he said. “Market cap is about 2X GDP – around a 100-year high – vs. closer to 1x in 2007.”

McGlone pointed to a number of headwinds that could lead to a pullback in the yellow metal, though in the long term, he still expects its price to climb higher.

“The decisive US transfer of power sparked some gold profit taking, but a second term for president-elect Donald Trump may solidify the metal’s underpinnings,” he said. “Potential gold headwinds could come from some combination of de-escalating geopolitical tensions: China tilting away from Russia and toward its best export customers – Europe and the US – a resilient US stock market, relatively high US interest rates, declining budget deficit and strong dollar.”

“Our bias is the precious metal has underpinnings to maintain its upward path, but not without some bumps,” he added. “Managed-money (hedge fund) net-long futures, which is about 24 million ounces, have been quite stretched over 40% of open interest. Gold ETF holdings at about 84 million ounces have turned upward, suggesting longer-term investors are offsetting potential spec liquidation.”

Looking closer at gold’s performance compared to the S&P 500, McGlone noted that the two have exhibited a strong correlation, but warned that this could soon come to an end.

“Gold on the same scale as the S&P 500 shows a close upward trajectory since about 2015 that may be ripening for disconnection, if the yield curve is a guide,” he said. “At about $2,700 on Nov. 7, the ounces of gold may be low at less than half the stock index as the spread between the US Treasury three-month bill and 30-year bond yield disinverts from the steepest-for-longest inversion in our database since 1977.”

“The graphic shows gold’s propensity to rise vs. the stock market in similar circumstances,” he said.

“Sure, it’s different this time, as indicated by equity and gold prices making record highs,” he added. “But until it isn’t may be the bottom line at the start of the second Trump administration. The way we see it, the stock market would have to keep rising, or gold appears more likely to do what it typically has when the curve disinverts.”

McGlone also highlighted gold’s outperformance relative to other commodities and said this is unlikely to change in the near term.

“The Bloomberg Commodity Index Total Return is flat year over year to Nov. 7 on the back of gold’s roughly 35% gain, which may suggest 2025 deflationary leanings,” he said.

“Will broad commodities catch the metal or keep gravitating toward break-even cost, low-price cures?” he questioned. “Gold is relatively elevated vs. most commodities but historically low compared with the US stock market, which could portend an inordinate burden on equities to keep going up to avoid deflationary dominoes.”

“Our graphic shows what matters most in commodities, especially on a total return basis: Metals have an enduring history of outperforming, led by gold,” McGlone highlighted.

“A question to ask is whether this track changes or potentially accelerates in 2025, and our bias

leans toward the stalwart metals, with gold appearing more likely to take the prize if equities decline,” he concluded.

Posted by:

Jack Dempsey, President

401 Gold Consultants LLC

jdemp2003@gmail.com