Gold's weak stretch may come as a surprise for anyone who has embraced its reputation as a safe haven.Hiba Kola/Reuters
The first casualty of war is … gold?
After the United States and Israel launched attacks against Iran at the end of February – drawing other Gulf nations into the conflict, igniting the greatest energy crisis in decades and raising the threat of inflation – the price of gold has taken a beating.
It traded as low as US$4,100 an ounce this past Monday, down 27 per cent from its high in January.
Even with some rebounding later in the week after U.S. President Donald Trump signalled a willingness to end hostilities, gold remained well off its highs. As of Thursday, it was still down about US$800 an ounce since the war began.
This weak stretch may come as a surprise for anyone who has embraced gold’s reputation as a store of value when inflationary pressures are rising, geopolitical tensions are building and faith in paper currencies is wobbling.
Bullion’s rise to a record high above US$5,600 an ounce in late January was largely attributed to concerns about huge government debts and the dismal outlook for the U.S. dollar.
Some central banks increased their gold holdings to diversify their foreign exchange reserves away from the U.S. dollar, which added to gold’s allure.
Surely a war and a bout of stock market volatility would take the price to the next level – say, above US$6,000 an ounce – as investors sought havens from Mr. Trump’s erratic policies.
Nope.
“One might have thought that the potential for the largest inflation shock in 50 years might have seen gold increase. Gold, however, is right now trading like a risk asset,” Max Layton, a commodities analyst at Citigroup, said in a note this week.
Gold’s sharp decline suggests it isn’t much different than a hot stock that rose too high, too fast.
The rally may have been driven by momentum-chasing investors, given the amount of money that flooded into exchange-traded funds that provide instant access to the commodity. Now, these investors may be losing their nerve as financial markets turn rocky.
Don’t be fooled into buying on gold’s dip
Gold mining stocks have also suffered. Since the end of February, the NYSE Arca Gold BUGS Index, which tracks dozens of producers, has fallen 25 per cent.
Within the S&P/TSX 60 index over the past month, gold producers have become the biggest laggards – a major shift given that these stocks contributed some of the biggest gains to the blue-chip Canadian index over the past year.
For long-term believers in gold, this volatility might look like nothing more than a ripple: The commodity has gained more than US$2,300 an ounce since the start of 2024.
And look at what gold stocks have done. Agnico Eagle Mines Ltd. AEM-T – the largest Canadian gold company based on the combined value of its outstanding shares – has rallied 275 per cent over the same period.
But will believers rush in to buy this dip?
Gold is difficult to value, given that it produces no earnings or dividends. And unlike base metals or even silver, its use in electronics isn’t huge. These industrial applications drive just 7 per cent of global gold demand, according to Natural Resources Canada.
The biggest drivers can be flighty. Jewelry accounts for about 44 per cent of demand, with the rest roughly split between central banks and investors.
Let’s put this bluntly: No one needs gold.
If the bullish case rests on the metal’s status as a haven from the ravages of war and inflation, then the past month offers a compelling rebuttal to that case.
The U.S. dollar and defensive stock market sectors, such as utilities and telecoms, have been the true havens over this tumultuous period, gaining ground.
Even bonds look relatively stable, despite concerns about rising energy prices filtering through the economy and driving inflation expectations higher.
The iShares Core Aggregate Bond ETF, which holds a variety of U.S. investment-grade bonds, is down all of 2.4 per cent over the past month. It has outperformed the S&P 500 by four percentage points.
Sure, gold can regain its allure.
Given its tight correlation with the stock market over the past month, it could easily rebound if Mr. Trump strikes a deal with Iran that alleviates the energy crisis and gives new life to the bull market. You could see signs of this rebound in tentative rallies this week, when the price of gold jumped at the hint of peace with Iran.
But these gains merely supported an uncomfortable pattern that is taking shape this year: Gold is for risk-takers, not haven-seekers.