'A fascinating time to be an investor'
Apparently all that glitters is gold. Over the past year the precious metal has been on a steady march higher, but the gold price chart went dramatically parabolic upward following President Trump's "day of liberation" in early April, and now sits comfortably at an all-time record high -- and that's a super long "all time."
I am not going to pretend to be an expert in the gold market. My team has a gold ETF in only one of our many managed investment strategies and I have some opinions about best practices when owning physical gold, but I find the overall topic a bit obscure and have been often frustrated by the yellow metal during my investing career.
With this in mind, I am not going to discuss whether investing in, or selling gold already owned, is a good idea right now. It's doubtful I would be right anyway. Instead, I am much more interested in the "why" behind the recent stratospheric move in gold, and what this investing logic may mean to the financial markets and the global monetary system more broadly. Let's jump in.
To develop our logical framework when considering the trend in gold, I think it's important currently to look at what other trends are occurring in contrast or support of what is happening with gold prices.
The financial markets have clearly entered a period of disruption, marked by changing capital flows and increased volatility in core asset classes and currencies. In its first 100 days, the Trump administration has pretty much disrupted every norm and principle of global trade (along with a whole host of other norms), and while tariffs get all the attention, the policy resets being negotiated behind the tariff headlines go much deeper.
The immediate result of this disruption is a U.S. "risk off" trade, marked by U.S. stock markets sinking nearly 20% before the recent bounce. In past cycles, when risk off trends were asserted in stocks, the capital flight would flow to less volatile assets such as U.S. Treasuries and the U.S. dollar. But not this time.
The current trend lower in U.S. stocks has been coupled by a simultaneous decline in the value of the dollar versus its global peers (U.S. Dollar Index), and a rise in U.S. interest rates which is directly related to a capital flight out of U.S. Treasury bonds. Or said simply, this isn't just a risk off trade -- this is an America off trade. It would appear something is driving capital out of the United States, but what and to where? Let's look around.
Well, based on stock indexes, we can deduce European stocks which are performing well right now are receiving some of the capital flows, as well as European government bonds as indicated by European yields which have moved lower (yields move lower when bond prices rise). The same trend to a lesser extent may be unfolding in Asian financial markets, but nothing so dramatic on either continent like the move seen in gold.
In the modern world, when capital flows out of financial markets we also need to look at cryptocurrency as a potential recipient. But crypto assets are also down considerably this year. Looking at all these various indexes and factors together, in my opinion, the move in gold may not just reflect the outflow of capital from U.S. financial markets -- it also could reflect an outflow from financial instruments in general, including crypto. Now the conversation is getting interesting.
Global financial institutions and governments, including central banks, can't just store capital under the proverbial mattress. I think the word "store" here is a better choice than the word "invest." These entities are charged with supporting governments and currencies. Sure, they would like some return on capital, but what is more importantly needed is assets that preserve value.
For decades, U.S. Treasury bonds and the U.S. dollar have served this function. This may be changing, at least on some preliminary level, and gold may be playing an important part.
If we look at the U.S. national debt and deficit spending in the context of the standards directed by the International Monetary Fund for foreign governments and economies, the metrics don't look good. But we aren't a small foreign economy in need of dollars, we are the behemoth who actually creates the dollars, so we get a lot more leash.
But that leash doesn't stretch forever, and our national credit card is about maxed out. So, while the recent move in gold may be reactive to the Trump tariff drama, it might also indicate a trend away from financial assets in general, with gold serving as the default alternative.
If this speculative observation is true, then eventually the stocks of fiscally strong global corporations, real estate, commodities and even crypto will likely attract capital flows as well, and would do so at the expense of traditional currencies and sovereign bonds. We will have to wait to see if more trends supporting this gold hypothesis emerge. There is no doubt -- this is a fascinating time to be an investor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. No investment strategy can guarantee a profit or preserve against loss. Past performance is not a guarantee of future results. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.
