Gold continues to be supported by both fundamental and technical factors. We’ve written previously on why we’re so bullish on the commodity, and today it’s time for even more reasons it deserves a prominent place in portfolios.
Gold has a 60% positive correlation to the general level of economic uncertainty, which has definitely come off the boil, but is still twice the long-run average. Concerns over monetary policy and political influence have taken center stage after the Big Beautiful Bill in the U.S. got passed, and the tariff file became less onerous than feared in April. Fed policy uncertainty is close to 3 times higher than normal levels, and this is not going away any time soon.
Gold also has a huge historical 85% inverse correlation (although it may be lower now) to real interest rates and the U.S. dollar. Both are on downslopes. Real 10-year yields have come down 60 basis points from the nearby peak to 1.8%, but are still some 90 basis points above the long-run mean. While the ECB and BoE may be done cutting, the Fed is just starting to rekindle the rate-cutting cycle. Same for the Bank of Canada.
As for the DXY dollar index, it is already down well over 10% from the earlier highs, and if it breaks below 95 (currently around 97), then we will see a cyclical bear market in the U.S. dollar index morph into something more secular in nature.
Commodities could be on the verge of a new super cycle
The supply-demand fundamentals for gold are very bullish to this day. Mined production growth is growing at 1.5% at an annual rate, but demand in aggregate is running north of 3.0% and from a variety of sources.
One of the critical sources of demand is the deep pockets of world central banks, which are no longer confined to the BRICS. We are seeing a classic mean-reversion trade here. In the 1980s and 1990s, when central banks were winding down their bullion reserves in favour of interest-bearing securities, sales of gold brought its price down by 50% and into a fundamental bear market that ended in 1999 with the Washington Agreement. And that coincided with the secular low of US$250 per ounce at that point.
But that is now reversing course. Back in 1980, the FX reserve share of gold in central bank vaults stood at 70%; by the late 1990s, down to 10%; and today, it is just over 20%. If this share mean-reverts to 30%, we are talking about gold going to US$4,500 per ounce on that sustained fund-flow support; and to over US$6,000 if we ever do go back to that 70% share that pre-dated the strategy to dump gold in the early 1980s. Keep in mind that global central banks still have a lot of work to do — a classic case in point is the U.K., which cut its gold reserves by half in the 1980s and 1990s, and Canada, where the central bank wound down its exposure to zero (talk about terrible timing).
Gold remains under-owned and underrepresented to this day, even amidst this raging bull market. From the research we have gleaned, just 1% of global assets are in bullion, and that is down from 26% in the early 1980s — the last time gold was where it is today adjusted for inflation.
The technical picture also looks very strong. Mapping out the 1971-1980 cycle and the current one since 1999, for the two legs to match on scale, we would need to see a peak of over US$6,000 this cycle. I don’t know the timing of the peak, but I know what the path to the peak looks like. Treat any corrections along the way (and they have been brief affairs) as buying opportunities in a secular uptrend.
In fact, that is a story in its own right. All gold has done is go back to around where it was 45 years ago in real terms. The S&P 500 on this basis has shot up over 13x by way of comparison.
We get asked all the time about comparing gold to Bitcoin. The problem is that gold is a classic “risk-off” asset, and Bitcoin is a “risk-on” asset that is more correlated with the Nasdaq 100 than anything else. It has three ties to gold’s volatility: the major point being that gold is a ballast and diversifier in the portfolio. Unlike Bitcoin, gold is a hedge against risk, while Bitcoin and crypto in general possess far riskier characteristics. There is something else to consider, which is that the first Bitcoin was mined 16 years ago, so it has barely made it through one full cycle. The earliest archaeological evidence of gold mining production goes back as far as 6,000 years. You be the judge as to which of these has withstood the test of time.
Meanwhile, the case for the gold miners is compelling.
In Canada (the world’s fourth largest producer), the sector has contributed 7.5 points to the TSX’s +18.5% YTD gain
The all-in production cost for the lowest-cost producers is US$1,500 per ounce and US$1,900 per ounce for the highest cost companies. Margins are fat, and 2026 free cash-flow yields are running at 10.0%.
The forward P/E multiple is at 16x, which is a nice discount to the overall market. Expected EPS growth is so huge that the sector trades at a 0.3x PEG ratio — compared to a near-2.0x ratio for the overall S&P 500 and TSX composite.
Not just that, but the Canadian gold mining group, even at current record levels, is still trading at a 40% historical discount to the underlying price of the commodity. In the U.S., we are talking about more than a full standard deviation when it comes to the gap between valuations in the S&P 500 gold equity group and the spot gold price.
Closing these gaps would require a doubling in the North American gold miners, even assuming no more price appreciation for bullion.
I know that I haven’t mentioned silver — “poor man’s gold.” We love gold, but we like silver. For the miners, margins are 3x fatter for the gold sector. And while the gold/silver price ratio did hit an extreme last April, half of that gap has been resolved. That said, we own both in our Rosie Macro Fund, and between the metals and the equities, they comprise just over 20% of the total assets in the model portfolio.
The last thing that we would like to highlight is that gold has registered new highs in terms of every major currency. So while the depreciating U.S. dollar continues to act as a catalyst, you know that gold is in a bona fide secular bull market when it is breaking out to fresh records across all exchange rates.
David Rosenberg is founder of Rosenberg Research.