Schroders analysis delves into how gold and gold equities performed during downturns
The financial markets have long anticipated a US recession. The US yield curve is clearly inverted, which indicates that long-term interest rates are lower than short-term ones. That often indicates that a recession is on the horizon sooner or later.
A recession may be on the horizon given the extremely dismal US ISM services numbers that were issued a couple of weeks ago. And according to an analysis by Schroders, investors will consequently be thinking about how much of each asset type they should allocate.
Schroders noted that during US recessions, gold often performs well both in absolute and relative terms; gold stocks have performed even better.
It added that when comparing the returns from the six months before the recession began to the six months after it ended, gold beat the S&P 500 by 37% and returned an average of 28%. Gold-related stocks have outperformed the S&P 500 by 69% and have produced average returns of 61%.
The US economic cycle is by no means the only element affecting the gold market because every cycle is unique. Schroders noted that gold price performance has been at its most explosive when the policy responses to the US have been especially lax or accommodating – as was the case in 1973, when Arthur Burns served as governor of the Federal Reserve, as well as in 2008 and 2020.
Schroder highlighted two additional factors for having a positive outlook on gold and gold equities.
First, the overall business climate for gold stocks appears to be getting better through 2023.
It won't likely be as difficult as it was in 2022. Profit margins for gold producers were tightened last year due to escalating expenses (oil, steel, labour) and declining gold prices. As a result, gold producing stocks underperformed gold (at least in US dollar terms).
Second, investors are still significantly under-positioned and gold producer stocks are still trading at low levels from a long-term perspective.
Citing an analysis from Scotia, Schroders said investors now hold almost no weight in gold-related stocks. The S&P/TSX Composite Index, Canada's benchmark equity index, also carries a small weight of gold-related stocks relative to history.
“Resource-rich Canada has a number of listed gold producers, which is why their weight in this index provides a useful guide to investor appetite for gold equities,” it said.
