What the gold rally is really telling investors

Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

Gold rally is part of a pattern

CIBC chief economist Avery Shenfeld attempted to explain the ongoing gold rally,

“Those basking in bullion’s current sheen argue that Professor Gold is trying to teach us something about the state of the U.S. economy. The problem is that most of these explanations contradict what other, larger markets are saying … If it’s tied to fears of elevated US inflation, then why is gold peaking now, when price pressures are much cooler than in 2023? Inflation linked bonds aren’t showing a rapid escalation in inflation fears. Are investors fleeing US Treasuries and buying gold in fear of a default? Some foreign central banks from countries with shaky relations with Washington have been doing that trade … The broader market isn’t driving up long term US rates and the curve’s steepness isn’t out of line with pre-global-financial-crisis norms … Could gold’s gains be driven by talk of a politicized Fed that will undermine the dollar? If most investors shared a negative view of it, we would be seeing a lot more USD depreciation … A sign of impending economic peril? The equity market clearly doesn’t think so. Gold is no longer trading with a negative beta to US stocks … story in which risky assets have moved up sharply. Is there’s a connection in the simultaneous surge in precious metals, bitcoin, meme stocks, and equities trading with elevated price-earnings multiples? While each asset class has its own investor pool, there appears to have been a shift from patient investing based on financial fundamentals, which rarely offer get rich quick opportunities, towards the rush of trading in assets, or placing bets, that can almost magically double, or soar tenfold”

“What Professor Gold is teaching us” – CIBC Economics

Big changes could be ahead for the TSX 60

Scotiabank strategist Jean-Michel Gauthier expects more changes than usual in the TSX 60 index,

“it would not be surprising if S&P proposed at some point in the next 12 months a methodology update for the TSX 60. This is the second year in a row that most participants indicated a need for quicker deletions for small names and more visibility on deletion expectations. At the very least, the index committee was told again to be more proactive in deleting small names (read CAR-U and AQN). S&P will also likely clarify as soon as possible whether the June quarterly rebalance will remain on Friday or move to Thursday to remain in-sync with the US”

Changes in major indexes move stock prices - increasing for the additions and weakness for the deletions – as passive investing funds reallocate.

Portfolio managers are very bullish

BofA Securities monthly global fund manager survey (FMS) underscores bullishness that might be bumping up against complacency,

“October FMS investor sentiment most bullish since Feb’25; stock allocation at 8-month highs, bond allocation lowest since Oct’22, FMS cash levels at very low 3.8 per cent, liquidity conditions rated best since Sep’21; full-bull sentiment tempered by growing concerns of private credit event and AI bubble … global recession concerns at lowest level since Feb’22, biggest 6- month surge in growth optimism since Oct’20 … On Risks & Crowds: #1 most crowded trade is “long gold” (43 per cent), #1 tail risk is “AI bubble (33 per cent), and #1 systemic credit event source now seen as “private equity/credit” (surges to 57 per cent), but FMS positioning shows investors see returns outweighing risks … Contrarian Trades: based on FMS positions, contrarian trades for Oct are: long bonds “

Bluesky post of the day

Diversion

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