Gold’s timeless allure and charting its uncertain future

It’s hard to imagine, but only since 1971 has the gold standard stopped being a major part of the world’s official monetary system. For centuries, gold backed currencies and stabilized economies, but today, it’s no longer tied to paper money. An ounce of gold pays no interest, no dividends, and storing it costs money. By most measures, you would think its value would have collapsed long ago. Yet now, gold is at all-time highs. Why?

Gold’s allure isn’t just about inflation – it thrives in uncertainty, which is something we’ve had no shortage of in recent years. In fact, the price of gold has almost doubled over the past five years to the end of April. Any asset that moves up so strongly in such a short period of time is likely to garner a lot of attention. Understanding why it’s surging today, and how it affects Canadian investors, is important to determine future risks and rewards in owning the yellow metal.

Gold’s enduring appeal

Around 75% of gold mined today is used for jewelry. It’s also used in electronics, dentistry and medicine, but its main driver is still financial.

Many believe the price of gold and inflation are linked, but its appeal goes beyond inflation. More accurately, gold thrives on uncertainty. Since 1971, we’ve seen a few major waves of price surges:

• The stagflation and inflation period of the 1970s and early 1980s, when gold served as a hedge against inflation.
• The tech wreck of 2000 and the global financial crisis of 2008, when high-flying tech stocks lost billions in market value. As things began to normalize, the global financial crisis of 2008 appeared. This caused investors to question the stability of the global financial system itself.
• The COVID-19 pandemic, which drastically slowed global GDP and involved significant government spending to help subsidize workers affected by various forced closures.
• Recent tensions, from Russia’s invasion of Ukraine, which prompted worldwide reaction with sanctions against Russia, to the Israel-Hamas conflict, which has led to concerns of a wider conflict in the middle east.

Today, central banks – including China and Russia – are buying gold. Moving into 2025, the Trump presidency has laid the foundation for a global trade war, adding to the sense of unease. This has the potential to further undermine the U.S. dollar as a safe-haven asset, prompting more investors to sell U.S. dollars and buy gold.

Canadian stock market glitters

The rise in gold’s price has had an impact on the Canadian stock market in particular. Historically, our market has been fairly unique among the world’s equity markets in its heavy weighting towards gold mining stocks, many of which have just a few operations in Canada.

Over the past 2 years, the weight of the precious metals subsector within the S&P/TSX Composite Index has climbed from around 7% to over 10%. Not only have many gold (and silver) companies seen their share prices rise, we’ve also seen smaller companies that are higher cost producers become profitable and enter the index. A situation that could easily reverse should gold move lower.

While gold’s price run-up has been impressive, it’s worth noting that an investment in bullion since 1985 has woefully underperformed the Canadian stock market, as measured by the S&P/TSX Composite Index (see figure 1). Interestingly, the difference in returns between the Canadian stock market and gold bullion was largely due to dividends.

Figure 1: Gold bullion vs S&P/TSX Composite Index since 1985

Total returns in USD

Source: FactSet

Where does gold go from here?

Gold’s next move is hard to predict and will likely hinge upon how geopolitical events unfold – particularly the implementation and economic impact of the Trump tariffs. Should the U.S. back away from its aggressive international trade policies, in particular with China, then we would expect gold prices to fall somewhat. However, an escalation of these moves would likely keep gold prices elevated.

As investors, we shy away from purchasing physical commodities such as gold. Instead, we look at companies that produce commodities the same way we look at all companies. Looking at factors such as profitability, management, balance sheet and valuation. A well-managed gold mining company can respond to fluctuations in the gold price by judiciously altering its production or managing costs and capital expenditures. This helps mitigate the direct effect of gold price variability.

One example is Agnico Eagle Mines, a Canadian company with exposure to safer jurisdictions like North America and Scandinavia. It continues to expand resources at existing operations, while maintaining a disciplined focus on mining gold profitably. A quality company that just happens to produce gold.

The runup in gold has been impressive, but history tells us these moves are often followed by extended periods of underperformance. That’s why it’s critical to not get caught up in the hype. We believe owning high-quality businesses is safer, and more lucrative, in the long term. For gold, that means select producers – rather than the metal itself – remain a wiser way to make portfolios shine.

Sources: World Gold Council, Bloomberg

 

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