BMO GAM CIO explains why gold prices have outpaced the S&P 500 and what’s driving further interest in the yellow metal
In the past six months, gold has outperformed the S&P 500. What makes that statement all the more notable, is that it’s done so in a bull market. The S&P 500 has risen over 18 per cent in the past six months, but gold prices have risen over 20 per cent. It’s a trend that goes back roughly to October of 2023, when both gold and the S&P 500 began a pair of bull runs.
So why is the traditional hedge against downturns, market volatility, and economic weakness doing so well at the same time as an equity bull market? Sadiq Adatia, Chief Investment Officer at BMO Global Asset Management (GAM), explains that gold has been driven in part by more bearish bets against a market still dominated by a few concentrated players, as well as the key role of central banks and state actors in the gold market. Despite its remarkable run to date, he shared why he remains constructive on gold as a useful tool in client portfolios.
“Gold is not behaving like it traditionally does. Normally it’s an inflation hedge, a hedge against the US dollar, and it normally reacts to yield. What we saw in the first half of the year was that gold was strong and so was the US dollar, it moved up even when there was no risk aversion,” Adatia says. “People are holding it for many different reasons, not just traditional reasons. Sovereign wealth companies and countries are buying gold as another store of value for other currencies.
“You’re also seeing consumers buying more gold, if you recall Costco sold out of gold bars in the US this year. At the same time, people are holding it for normal reasons, because they’re worried about downturns in the economy or consumer weakness. There are so many different reasons people are holding gold, which has increased the opportunity dramatically.”
Adatia notes that gold’s outperformance against the S&P 500 goes back further than this bull run. When markets were down around 7 per cent by October of 2023, gold was up around 7 per cent. He still sees that defensive utility in gold, but adds that the asset has shown remarkable growth.
One of the driving forces behind interest in gold, despite the bull run in equities, is investor sentiment. Adatia believes that this is probably “the least loved bull market that we’ve seen.” That’s because of the concentrated momentum names driving US equities.
Investors who own the S&P 500 probably feel fine. Investors who allocated to those big momentum names probably feel great. But investors who sought broader-based exposures or looked at value stocks when momentum got expensive, are probably feeling a lot of regret. Gold’s recent run offers those more bearish investors a defensive asset class that appears to have some major tailwinds behind it. Though Adatia notes that he doesn’t expect gold to continue to outpace the S&P 500.
In the past month, for example, the pace of gold’s price increase slowed somewhat. Adatia attributes that largely to a pause in gold purchases by the People’s Bank of China. He also says that as more economic data emerge in the US and Canada that could support interest rate cuts, those more bearish investors may seek to diversify away from gold. Nevertheless, Adatia thinks that gold can continue to move higher and functions as a hedge against both delayed interest rate cuts or resurgent inflation.
That’s not to say he sees gold as risk-free. Adatia says that if we see large countries beginning to offload their gold assets in favour of the US dollar that could drop gold prices lower. He sees that as highly unlikely, though, and says that international appetite for gold should help keep prices elevated for the foreseeable future. There could be some marginal drops as investors take profits, but he doesn’t see a major catalyst for a structural downward shift.
As clients come to their advisors with questions about gold, Adatia says that the messaging should continue to focus on the fundamental reasons investors tend to own gold.
“I think people should old gold for the normal reasons why they want to own gold,” Adatia says. “Protection against market volatility, inflation, and the US Dollar. Those are the reasons you want to own gold. Everything else is gravy.”
